The Up Side of Down: A Book About Failure

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upsidedownFailure. Or as Megan McArdle puts it – “deep, soul-crushing periods of misery following stupid mistakes that kept me awake until the small hours of the morning in a fog of anxiety and regret.” Yup, I’ve been there.

I was afraid that the new book The Up Side of Down: Why Failing Well Is the Key to Success was just going to tell me “don’t give up” over 300 pages. I read it anyway because I enjoyed reading some of the author’s other online articles (mentioned here, here), and I’m glad I did because the book actually looks at failure from a lot of interesting and different perspectives. While sorting through my notes, I managed to batch them into three larger themes:

You shouldn’t hate failure so much. “Keep on trying” is indeed one of the themes (just not the only one). Failure is often a critical part of success. As such, we really shouldn’t be so afraid of it assuming the potential result isn’t truly catastrophic.

  • There are very few entrepreneurs with multiple big successes. Instead, there are a lot of entrepreneurs with a lot of failures both before and after their single big success. The rest of us just never hear about the failures. As they say, “you only need to get rich once”.
  • Good judgment comes of experience – and experience comes from bad judgment!
  • This reminded me of that fact that a huge part of website development these days is little experiments and iteration. Not sure which is better? Try both (A/B test) and see. Try lots of small incremental changes and see what works. Fail and learn quickly.
  • When you ask people “What is the best thing that ever happened to you?” the answer is often a failure. A divorce that leads to a great new relationship. Hitting bottom and getting sober. Being fired from a steady but boring job, which forces you to help start a small business.
  • I just read an interview with Howard Marks, a famous investor and founder of Oaktree Capital (I also read his book). Even he got rejected from his dream job – “If it hadn’t been for that bit of bad luck, I could have spent 30 years at Lehman Brothers”.

Still, people really hate failure. It may be evolutionary, but people have developed many behavioral and cognitive biases to protect them from the pain of failure.

  • Finding a job can be soul-crushing because it involves repeated attempts and repeated failures. This is why many people give up and simply stop looking after a certain period of unemployment. The prospect of all those rejections is also why many people don’t start looking until their unemployment benefits are about to run out.
  • Normalcy bias is the tendency to act as if things are fine when they are obviously not. The long, gradual decline of General Motors is presented as an example until they were finally forced into bankruptcy (failure!) and is now making a comeback. This reminded me of Warren Buffett’s warnings about the upcoming crisis in municipal pension obligations.
  • Confirmation bias is the tendency to only see evidence that supports your theory and ignore any contradictory evidence. Book examples include the Dan Rather Killian documents controversy and the NASA Challenger disaster.
  • This reminded me of Charlie Munger and his principle of inversion (read his book too!). Always try to look at things backwards. For example, instead of looking for things that you should do to achieve a goal, consider making a list of things you would do to make sure you never reach that goal. Then make sure not to do those things.

Therefore, attitude is very important.

  • The people most likely to find work are the ones who keep trying every day (treating job-seeking as a job itself) and those who are willing to compromise (lower pay, move cities). Unemployment is like a big, dark room with just one exit. Only the ones who keep looking will get out (unless you’re really lucky). The idle will stay in the dark room forever.
  • Studies have found that successful people believe that outcomes depend on their decisions. The key word is believe. Even if it isn’t actually true that it is all about your personal decisions, it helps when you believe it is true.
  • In order to help make people have a better attitude, it is best for the system to “punish” failures with consistent, immediate corrections with an emphasis on rehabilitation rather than retribution. If people admit that they were wrong, let them fail, hit them with a penalty, but give them the chance to pick themselves back up.
  • The paradox of forgiveness. It has been helpful for this country to have bankruptcy as an option (as opposed to debtor’s prisons or lifelong servitude), but only because as a whole our country places a large stigma on bankruptcy and fewer people take that option than you would expect using cold math.

How Children Succeed: Grit, Curiosity, and the Hidden Power of Character

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toughbookWhat makes children, or even adults, succeed? It’s commonly believed that cognitive skills, also known as intelligence, are a primary factor. Smart people are the successful ones, right? Tests like the SAT measure this stuff, skills like pattern recognition, reading comprehension, and math problems.

But in the book How Children Succeed: Grit, Curiosity, and the Hidden Power of Character by Paul Tough, the author discovers a lot of evidence that doesn’t support that theory. Instead, non-cognitive “character” skills like perseverance, curiosity, optimism, and self-control may be even more important.

Tough weaves together various research studies and experiments to make this argument. Here are just a couple of examples:

  • GED vs. High-school graduates. Passing the GED test means you are proficient in the same academic areas as an actual high-school graduate. Yet people with GEDs are consistently less likely to graduate college, have lower incomes, and are more likely to be in jail. Why? Perhaps beings a high-school graduate requires additional traits – the inclination to persist at a often-boring task, the willingness to delay gratification for a long-term goal, or the ability to adapt to different social environments.
  • KIPP charter schools. KIPP schools are charter middle and high schools that take in lower-income students by lottery (no test screening) and use intensive educational efforts with the ultimate goal of a 4-year college degree. The first few KIPP classes improved their standardized test scores in middle and high school significantly. Yet the actual college graduation rates were disappointing, with a curious pattern:

    The students who persisted in college were not necessarily the ones who had excelled academically at KIPP. Instead, they seemed to be the ones who possessed certain other gifts, skills like optimism and resilience and social agility. They were the students who were able to recover from bad grades and resolve to do better next time; who could bounce back from unhappy breakups or fights with their parents; who could persuade professors to give them extra help after class; who could resist the urge to go out to the movies and instead stay home and study.

Further good news is that character skills appear to relatively malleable; you can learn to improve your level of grit and self-control. KIPP schools now provide their students with a “character report card” as well as traditional academic grades.

This book is a great read for parents and educators, but I would say that the conclusions extend to adults and even personal finance. We all need these skills to be good citizens. Being financially secure is simple on paper – spend less than you earn, invest the difference for the future, and keep it up every year. Hmmm… that sounds a lot like self-control, delayed gratification (and perhaps optimism :) ), and persistence.

I would argue that these character skills are more important than what you could learn in any book about Roth IRAs or modern portfolio theory. The question is how do we teach adults these traits, or is it too late?

Economy of You Book Review: Stories About Starting Your Own Microbusiness

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Microbusiness. Nanobusiness. Solopreneur. These new terms were created to describe the one-person businesses which Kim Palmer profiles in the new book The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your Life. Some people turn their business into a full-time job, while many keep their 9-5 jobs and run their ventures on the side. Palmer herself is a full-time editor for US News and World Report as well as a “side-gigger”, selling virtual financial planners on her Etsy shop Palmer’s Planners.

In terms of a synopsis, I would describe the book as breaking up the interviews of a number of solo entrepreneurs into major themes like:

  • How they discovered their idea or niche
  • How they built a support network for help
  • How they earned their first customers and grew from there
  • How they balanced their new business with a full-time job, family, etc.
    1.  
      Overall, the book is definitely more inspirational examples and idea generation than actual nuts-and-bolts guide on how to run a solo business.

      I enjoyed reading it, and here are my own impressions and takeaways from the book. Hopefully they will also help you decide if you should read it.

      A true microbusiness just needs one person and hardly any start-up money. This is my own definition, but I think it is appropriate. When I look at the people profiled in the book in addition to of all the business that my friends have started on their own, hardly any of them need more than maybe a few hundred dollars to get started. Website design. Writing a blog. Handcrafted jewelry. High-quality natural soaps. iPhone apps. Selling online coaching and e-books. If you need venture capital, it is not a microbusiness. Even if someone ends up owning a bakery, they often started by catering or baking custom cakes. You need enough personal ability and energy “saved” up to start, not money.

      You already know if you want to be a solo entrepreneur. Starting a microbusiness is definitely not for everyone. Do you have an itch in the back of your mind, an idea that you have been nursing for long time? Are you so enthusiastic about something that you wouldn’t mind it entering what used to be your free time? Many people are quite happy keeping their job and their play time separate. Finally, read this following book excerpt by Palmer after making her first few months of sales.

      As gratifying (and useful) as it was to earn that extra cash, it didn’t even begin to get at the satisfaction that my Etsy shop gave me. Each sale affirmed by ability to create something of value, a skill I sometimes doubted that I had as freelancing rates plummeted during the recession and writing jobs dried up. I had a new identity; I created and sold money planners. I began daydreaming about ways I could expand and new products I could design.

      There is no guarantee that your solo business venture will be wildly successful. But if just the act of doing it and getting a few readers or customers will give you great satisfaction, what have you got to lose? As noted, the start-up costs should be minimal. I started this blog with an $8 domain name, free open-source software, and web hosting for under $10 a month. 9 years later, I’m still doing it! :)

Omnivore’s Dilemma: Economics of Farming and Why Food Marketing Is Everywhere

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I’d like to make a habit of reading a book every other week in 2014. My first book is The Omnivore’s Dilemma: A Natural History of Four Meals by Michael Pollan. This 2006 NYT bestseller has already been well-discussed, but I saw it at my library’s donated book sale and wanted to read it for myself.

Instead of a regular review, I just wanted to share one financial concept inside about the special economics of food. We all learned in school that as prices go down, demand should go up. As demand goes up, the price tends to rebound until an equilibrium is found. But this doesn’t work for food producers:

The growth of the American food industry will always bump up against this troublesome biological fact: Try as we might, each of us can only eat about fifteen hundred pounds of food a year. Unlike many other products – CDs, say, or shoes – there’s a natural limit to how much food we each can consume without exploding. What this means for the food industry is that its natural rate of growth is somewhere around 1 percent per year – 1 percent being the annual growth rate of American population. The problem is that Wall Street won’t tolerate such an anemic rate of growth.

This leaves companies like General Mills and McDonald’s with two options if they hope to grow faster than the population: figure out how to get people to spend more money for the same three-quarters of a ton of food, or entice them to actually eat more than that. The two strategies are not mutually exclusive, of course, and the food industry energetically pursues them both at the same time.”

If farmers have a great year, they can actually make less money as prices plummet after product floods the market (due to our finite stomachs). Let’s look deeper into those two alternatives:

Convince people to spend more for the same amount of food. This is behind why everything is processed to the point of ultimate convenience with sleek packaging. Any cooking beyond using the microwave has been removed. Everything is in single-serving packages. Every new diet comes with its own line of ready-to-eat stuff in a box. Surprise, everything also gets more expensive! I just noticed that gluten-free pasta costs roughly 3 times as much as traditional pasta. Even terms like “organic” and “free-range” are twisted by marketing and may not mean what you think.

Convince people to eat more food. What we consider an acceptable portion size has increased over the years. From 1982 to 2002, the average pizza slice grew 70 percent in calories. Even the surface area of the average dinner plate expanded by 36 percent between 1960 and 2007 (source). Think of the “Upgrade” or “Combo” feature of many fast food menus. Why just order a sandwich and drink water, when for a little more you can get fries and a soda? Once you order the combo, why not “upgrade” to even larger fries and larger soda for just 50 cents?

This is why we are surrounded by food branding and food marketing. To fight back, we should buy food as close to their whole “raw material” state as possible in order to avoid the middleman (processing). Even though it does take more time, this makes the food we eat both healthier and cheaper overall.

Cooked: A Book About Why You Should… Cook

Consider the following questions that you may have asked yourself recently:

  • What can you do to consume fewer calories while eating healthier food?
  • How do you get your family to spend more time together, talk, and connect?
  • How do you get the public to care more about what they are eating, which in turns forces the food corporations to improve their standards?
  • What can modern super-specialized citizens do to feel more in touch with nature and self-sufficient?
  • How can you save some money?

I’m sure the title has given it away by now, but the answer is to cook! Specifically, cook at home for yourself and your family, as close to from scratch as possible. At least, that’s the lesson from the book Cooked: A Natural History of Transformation by Michael Pollan. A previous post expanded on the health benefits of cooking at home, and the book examines cooking as broken down into the four elements: Fire (BBQ), Water (Braises), Air (Bread), and Earth (Brewing).

Indeed, why is it that we seem more obsessed by food than ever (Food Network, Cooking Channel, Yelp, Food Bloggers Everywhere) at the exact same time that fewer and fewer people actually know how to cook? The food industry is betting that the current generation of kids will have hardly any idea of how to cook even basic dishes, as it means even more $$$ for them! A quote from consumer researcher Harry Balzer:

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Shareholder Yield: Better Stock Screening Metric Than Dividend Yield?

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I’ve read a few books about dividend investing and remain interested in the idea, although I’m not confident enough (yet?) to allocate my portfolio that way. Portfolio manager and writer Mebane Faber has a short book called Shareholder Yield: A Better Approach to Dividend Investing that offers another tweak on dividend investing strategy.

(As tweeted earlier, the Kindle eBook version is free until the end of Monday, which was a good promo as it got me to I read it. That, and it was only 55 pages.)

The book starts with an overview of history and academic research. First, a little over half the total return of the US stock market since 1871 is due to dividends. The smaller half is price appreciation, which when people talk about the S&P 500 index is all price appreciation. Second, stocks with higher dividends have had a higher historical return than stocks with little or no dividends.

So dividends are good, but they aren’t the entire picture. There are five ways for management to deploy the free cash flow generated by the company:

  1. Invest in existing operations,
  2. Acquire other businesses,
  3. Pay down debt,
  4. Repurchase stock (reducing outstanding shares), and
  5. Distribute cash to shareholders.

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Cooked: The Health Argument For Cooking At Home

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I’m roughly halfway through Cooked: A Natural History of Transformation by Michael Pollan. Although the book covers a variety of topics ranging from chemistry to religion to anthropology, the overarching theme is examining the practice of cooking meals for yourself (and your family).

Cooking food has become one of our most outsourced tasks. Everyone is busy. But is letting huge for-profit corporations prepare what we eat really worth the time savings if it costs us our health? Consider what studies have found:

  • When we cook meals ourselves, we eat less than when we outsource to frozen meals or restaurants.
  • Obesity rates are inversely correlated with the amount of time spent on food preparation.
  • Regular cooking is correlated with superior health and longevity.
  • Poor women who routinely cooked tended to have a more healthy diet than richer women who did not.

In the book, food industry expert Harry Balzer (who knows exactly how often we actually eat out, not just how much we admit to… which is a lot!) put forth some insightful diet advice:

Cook it yourself. Eat anything you want – just as long as you’re willing to cook it yourself.

Essentially, eating unhealthily these days is mostly the byproduct of eating out, including meals-in-a-box and frozen dinners.

There are many other potential benefits of cooking for ourselves, stay tuned for a full review. Together, I’m hoping they’ll convince me to start cooking regularly again!

Book Review: Damn Right! Biography of Charlie Munger

I recently finished reading the biography of Charles Munger done by Janet Lowe, Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, originally published in 2000. The book did a pretty good job of filling in details about his childhood and family history, although much of it was pieced together from existing speeches, books, and articles about Warren Buffett and Munger. (Although if you haven’t read any of that other stuff, you wouldn’t notice.) In any case, I still found many passages worth highlighting and saving:

On learning business skills from playing poker:

“Playing poker in the Army and as a young lawyer honed my business skills. What you have to learn is to fold early when the odds are against you, or if you have a big edge, back it heavily because you don’t get a big edge often. Opportunity comes, but it doesn’t come often, so seize it when it does come.”

On the merits of buying and holding onto investments for the long haul:

There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded.

And you think that most of you are going to get that much advantage by hiring investment counselors and paying them 1% to run around, incurring a lot of taxes on your behalf? Lots of luck.

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Ugly Americans Book: Eight Rules of Carney

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I’ve been falling behind on my book reviews. Here’s an older book I found that made for good airplane reading – Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions by Ben Mezrich. The book is supposedly based on the true story of young, male hedge fund traders during the mid-1990s Asian stock market boom who take big risks, make big money, meet beautiful women, don’t care about ethics… and after all that testosterone there’s the usual bit of self-reflection at the end. A major part of the plot even managed to involve boring ole’ index funds! :)

One of the main characters was head trader Dean Carney, who had his “8 Rules of Carney”:

  1. Never get into something you can’t get out by the closing bell. Every trade you make, you’re looking for the exit point. Always keep your eye on the exit point.
  2. Don’t ever take anything at face value. Because face value is the biggest lie of any market. Nothing is ever priced at its true worth. The key is to figure out the real, intrinsic value — and get it for much, much less.
  3. On minute, you have your feet on the ground and you’re moving forward. The next minute, the ground is gone and you’re falling. The key is to never land. Keep it in the air as long as you f—ing can.
  4. You walk into a room with a grenade, and your best-case scenario is walking back out still holding that grenade. Your worst-case scenario is that the grenade explodes, blowing you into little bloody pieces. The moral of the story: don’t make bets with no upside.
  5. Don’t overthink. If it looks like a duck and quacks like a duck — it’s a duck.
  6. Fear is the greatest motivator. Motivation is what it takes to find profit.
  7. The first place to look for a solution is within the problem itself.
  8. The ends justify the means, but there’s only one end that really matters. Ending up on a beach with a bottle of champagne.

Mezrich also wrote about the MIT Blackjack team in the NYT Bestseller Bringing Down the House, which was recently made into the movie 21 with Kevin Spacey. If you enjoy financial thrillers, both these books are fun page-turners.

Stefan Sagmeister: Things I Have Learned

Designer Stefan Sagmeister did another TEDtalk titled Happiness by design where the best part was when he shared the list below of “Things I have learned in my life so far” (which later became a book of typographic artwork).

  • Complaining is silly. Either act or forget.
  • Thinking life will be better in the future is stupid. I have to live now.
  • Being not truthful works against me.
  • Helping other people helps me.
  • Organizing a charity group is surprisingly easy.
  • Everything I do always comes back to me.
  • Drugs feel great in the beginning and become a drag later on.
  • Over time I get used to everything and start taking it for granted.
  • Money does not make me happy.
  • Traveling alone is helpful for a new perspective on life.
  • Assuming is stifling.
  • Keeping a diary supports my personal development.
  • Trying to look good limits my life.
  • Worrying solves nothing.
  • Material luxuries are best enjoyed in small doses.
  • Having guts always works out for me.

Stumbling On Happiness by Dan Gilbert – Book Review

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Stumbling on Happiness by Daniel Gilbert is in many ways like other popular behavioral psychology books. It’s a New York Times bestseller. It tends to list a lot of ways that humans behave irrationally or incorrectly as shown by academic studies. The writing is casual and accessible. It even has blurbs by other very popular authors like Steven Levitt, Malcolm Gladwell, and Daniel Kahneman.

This book was actually published back in 2007, but I came across a cheap used copy recently and bought it because it had “happiness” in the title. I was interested to see these behavioral quirks applied to happiness instead of the usual economics and money. Here are my notes.

What makes humans different than all other animals? Gilbert posits that humans are the only animals to think about the future. Some animals may do things by instinct like squirrels hiding nuts, but you’ll only find humans getting excited about planning their summer vacation, or fretting about being broke in their old age. I’ve never thought of it that way.

Using our imagination. How do we find out what will make us happy in the future? We use our imagination. But in a nutshell, our imagination isn’t very good.

To start, we don’t remember the past very well. We tend to leave some stuff out and also to fill in other details, all without knowing it. (This can’t be good for eyewitness testimony.) We think something is worth a lot more on the open market if we’ve owned it before (books, cars, stock shares, etc.)

Imagining the future is even worse. We believe that we’d be completely depressed if we were part of a conjoined twin, but actually most conjoined twins are quite happy and have no desire to be split up. The same holds true of many disabled individuals. Here’s another example. Would you rather have $20 in 365 days or $19 in 364 days? Most people choose the $20. But 364 days later, if given the choice again, much more people would choose $19 today vs. $20 tomorrow. The pain of waiting one-day is always the same, it just seems different depending on how your imagination looks at it.

Gilbert also points out that the data we have suggests that having children actually doesn’t bring happiness. Figure 23 in the book (see below) combines data from four different studies that show that marital satisfaction drops after birth and only increases again when the child leaves home. He says that society needs us to believe children bring happiness or else there would be no society. Hmm… I don’t know about this one.

The book ends a bit flat, as the conclusion is that the only way to know if something will make us happy in the future is to ask someone else experiencing the exact same thing right now. The problem is that as humans, we tend to think we’re snowflakes and that possibly can’t be true. (Except it does tend to be true, especially when you ask enough people.) Even the author admits that this is unsatisfying. Other than that, the best we can do is to simply acknowledge that our imaginations are imperfect.

A Beach Less Traveled: From Corporate Job to Flip Flop Perfumer – Book Review

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The book A Beach Less Traveled sounded like just the thing to read during a winter weekend… an American couple shares about their true story of going from “corporate chaos” to living in a tropical paradise where they run a small perfume shop. I love travel non-fiction, especially the work of authors like Peter Mayle and Bill Bryson. So accepted a free review copy of this book, hoping to be re-energized in my ongoing quest for financial freedom.

We meet the Berglunds, a very hardworking and reasonably successful couple living in the US. He was a lawyer, a lobbyist, and a trade association executive. His wife ran a small bed and breakfast. During their vacation travels, they fell in love with the small Caribbean island of St. Martin. They drew up a 10-year plan to create a perfumery and move there, as Berglund enjoyed chemistry as a hobby. Over the next 15 years, they saved up the million dollars that was necessary to make their goal happen – create and test their fragrances, buy a property for their store, buy inventory, market to tourists, etc.

It takes a skilled writer to weave all of this into an inspiring story. Unfortunately, the reading was much more dry. Things cost more than expected. Don’t they always? I was hoping for some examples of creative frugality, but nothing especially interesting popped up. Buying property on a small island that happens to be a overseas collectivity of France? Slow. Plus you’re a US citizen? Even slower. House repair? Takes a while. Phone repair? I get it. Island life is slow. Now, perhaps this is a good lesson for someone actually thinking about moving to the island, but I was left wanting for a charismatic character, a humorous story, or that “oooo-I-wish-I-could-do-that-too” feeling.

I also couldn’t help but be slightly annoyed when they talked about “living like a local”, but kept throwing out excuses about how they live in the French (and French-speaking) side of St. Martin but refused to learn French. That doesn’t sound like living like a local to me. If this is your new home, why not learn the language?

The Berglunds sound like nice, energetic people and I’m very happy they achieved their personal goals. They should be proud of themselves. I hope they are profitable in their new business as I believe they do need it to succeed. (They were not financially independent first.) I’m afraid I just didn’t find any inspiration in the book. The takeaway lesson seemed to be that if you really want it bad enough and save up a million dollars first over 10-15 years, you too can own a small business on a Caribbean island.