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Of my summer reads was The Stranger in the Woods: The Extraordinary Story of the Last True Hermit by Michael Finkel. Many people dream about leading a “quiet life” away from all the hustle and bustle. The “North Pond Hermit”, real name Christopher Knight, lived alone without speaking or interacting with another human being for 27 years. Read a preview in this GQ magazine article.
Since this is not a personal finance or investing book review, I will just let you read the nice synopsis from the Amazon listing:
In 1986, a shy and intelligent twenty-year-old named Christopher Knight left his home in Massachusetts, drove to Maine, and disappeared into the forest. He would not have a conversation with another human being until nearly three decades later, when he was arrested for stealing food. Living in a tent even through brutal winters, he had survived by his wits and courage, developing ingenious ways to store edibles and water, and to avoid freezing to death. He broke into nearby cottages for food, clothing, reading material, and other provisions, taking only what he needed but terrifying a community never able to solve the mysterious burglaries. Based on extensive interviews with Knight himself, this is a vividly detailed account of his secluded life—why did he leave? what did he learn?—as well as the challenges he has faced since returning to the world. It is a gripping story of survival that asks fundamental questions about solitude, community, and what makes a good life, and a deeply moving portrait of a man who was determined to live his own way, and succeeded.
People seem to form strong opinions about this story. Some treat him as some sort of inspirational figure. Others only saw a saw a weirdo that stole a bunch of things. A lot of time and energy was spent trying to label him with the appropriate psychological disorder.
My takeaway from the book was that he was a simple guy. He wanted to be alone. That was it. He wasn’t a libertarian or other political leader. He wasn’t religious. He wasn’t an environmental activist. He was never violent and didn’t carry a weapon. He wasn’t trying to impose his views on anyone.
The fatal flaw to his plan was that he couldn’t provide his own food and shelter. He had to steal things from other humans to keep warm and to feed himself. His criminal trial sounded rather boring – He pled guilty for stealing about $2,000 worth of stuff like propane tanks, canned food, and batteries. More importantly, he affected the personal security of the people he stole from. Knight did wrong things, and he knew it. He served roughly a year in jail with specific terms during probation.
I kept thinking to myself – Christopher Knight could have lived alone forever if he had just worked and saved up some money for a few years. He has nearly all the traits required for early retirement – disciplined, resourceful, low expenses, and disregard for social pressure. Knight said that growing up as a kid, his rural Maine family taught him that being tough was better than strong, and clever is better than intelligent.
What if he had read the books Your Money or Your Life or Early Retirement Extreme when he was 20 years old? (I know they weren’t published until 1992 and 2010. But what if they were?) ERE author Jacob Lund Fisker used to catch flack because he voluntarily took cold showers to both save money and follow his personal philosophy of self-discipline and low environmental waste. Christopher Knight took cold baths from a bucket of rainwater for 27 years. No problem.
He had already shown that he was willing to sacrifice nearly anything to stay away from people. He was willing to live in a tent. He pooped in the bushes. He never spoke a single word so as to keep hidden. How much would it really have cost him to live in the woods alone? $5,000 a year? If you use the 25x rule (aka 4% withdrawal rate), that’s $125,000. If he kept his previous job as a home security technician, he probably could have saved that up in 5 years.
This guy is not a role model, but that’s kind of the point – with financial independence you don’t need to worry about what others think. The book doesn’t provide a current update on Christopher Knight. Maybe he did save up enough “F- You money” and is now alone again somewhere, minding his own business.
What would you do if you knew that skipping that morning $4 coffee/muffin combo every day would get you 8 months closer to financial freedom? What if I told you that buying that $40k car instead of the $25k one would only extend your working years by 3 months? That’s the entire purpose of the Pretirement app (Apple iOS/Android):
A financial independence app that instantly converts spending or savings decisions into days, weeks, or years of your life.
After you supply some initial numbers and assumptions, it will provide a countdown timer to your financial freedom date. You can then input a specific change to your current saving/spending routine, and it will show you the impact to that date. Found via Reuters.
There are no fancy Monte Carlo simulations, but the underlying math appears correct and the overall design is pleasing in a minimalist way.
What the app shows you is that long-term habits matter more than temporary changes. If you make permanent saving change like dropping the morning $4 breakfast stop, you can put more money towards your nest egg and your required nest egg is smaller. If you just do a one-time saving of $100 or even $1,000, it really doesn’t make much of a dent. You need to be able to repeat the savings over and over. It’s similar to weight loss: Diets don’t work.
Hopefully, people can use this information as activation energy to change their habits for the better. (Ironically, activation energy is explained using coffee…) The developer Danny Murphy himself has started cooking more and eating out less after going through this exercise. It took us lot of initial effort to learn how to cook efficiently, but after developing a set of “go-to meals” and a pre-plan method it has become much easier.
If you are truly serious about early retirement, my advice would be to look for things that you can change permanently and/or automate so you can repeat it without requiring constant willpower. This usually means a larger, upfront effort. Up your 401(k) contribution by 1% every year. Relocate to a cheaper city. Move to cheaper housing. Search for a better job. Once you set yourself up on the right path, go ahead and enjoy your prioritized expenses – be it high-quality coffee or fun cars.
The Standard eBooks Project is a new volunteer-driven, not-for-profit project that produces carefully-formatted, open-source, and free public domain ebooks. They improve upon the work of sites like Project Gutenberg and HathiTrust in the following ways:
Basically, it makes these public domain books easier to download and more pleasurable to read. The only drawback so far is that the library is somewhat limited. You can also contribute in a variety of ways, from reporting errors to proofing entire books. Found via Daring Fireball.
The .epub format works with iBooks and most other readers, so you can download directly from iPad or iPhone. If you prefer to read on an Amazon Kindle, visit the website using your built-in web browser and download the .azw3 file directly. This saves you the step of having to transfer files from your computer.
Another source of free eBooks with improved formatting is Feedbooks.
I’ve been told that my blog isn’t personal enough. Father’s Day seemed like an appropriate time to share how our efforts towards financial freedom have altered our day-to-day lives.
Guiding principle. When I first started chasing the idea of “early retirement”, it was mostly about escaping the chains of a 9-5 corporate job for the next 40 years. These days, I am driven primarily to avoid the most common deathbed regret:
I wish I’d had the courage to live a life true to myself, not the life others expected of me.
This is beautifully phrased, as it will mean something different to everyone. You have to push away the expectations and noise coming from society, your co-workers, even your friends and family. Some people call it mindfulness or meditation, I just call it that quiet voice inside you. Another good take on this from Anthony Bourdain:
It’s a quality-of-life issue with me. Am I having fun? Am I surrounded by people I like? Are we proud of what we’re doing? Do we have anything to regret when we look in the mirror tomorrow? Those things are huge to me.
Choosing semi-retirement over daycare. Up until 2012, my wife and I were dual, full-time earners with a healthy savings rate used to steadily accumulate assets. We spent our free time eating at new restaurants, traveling, hiking, skiing, and playing with our two dogs.
When our first child arrived, we weren’t quite ready to live off our investments but we still wanted to spend a lot of time raising our kids. We decided that we would both work roughly 20 hours a week (“half-time”) and share the stay-at-home parenting duties between us. Technically, we both semi-retired at age 33. At the same time, it was nothing to brag about because many families have a single income parent and a stay-at-home parent. We just happen to split it up. Today, we continue as 50/50 parents and somehow accumulated three kids: a 6-month old, a 2-year-old, and a 4-year-old.
For a many couples, it is simply financially efficient to keep working full-time and pay for daycare. For others, both individuals want to maintain their career trajectory. Both are a valid options and we don’t pass judgment. For us, giving up essentially one full income was also a big decision. We were concerned that we would be giving up current income now and likely stall our future career growth.
Ever since growing up as kid with a dad working long hours, I made a promise to be different when I had children of my own. I never want to utter the words “I wish I spent more time with my kids”. As a direct result of our aggressive savings rate in our 20s and early 30s, we felt comfortable taking an unconventional path. We are thankful every day that we don’t have to drop off our baby at 7am, work all day, come home, and only see them for an hour before bedtime.
Snapshot of our daily lives. We are not the most frugal family, but again we try to live aligned to our values. Our home is not overly big – two girls already share a bedroom and eventually all three will share one bathroom. We cook dinner at home more often than not. We rarely eat out. Our frequent flyer points are mostly idle nowadays, but we did take our 1-year-old and 3-year-old to visit the UK and France last summer. One of the highlights was feeding free-ranging reindeer in Scotland.
Is semi-retirement all sunshine and rainbows? Yes, we’ve never had to deal with daycare or hire a nanny. Either my wife or I have been there for every single bathtime and bedtime. One of us has been present for all the first laughs, first words, first crawls, and first steps. But we also feel physically exhausted at the end of every day. I’m definitely more worn out now than our time as DINKs (dual income, no kids).
You really start to appreciate working with adults again after wrestling with three little tyrants children under the age of 5. Yesterday, my oldest child decided to stick her finger down the youngest’s throat. Guess who got to clean up projectile vomit off a shockingly-high blast radius? I’m pretty sure the comic Fowl Language installed a hidden camera inside my house (check out the book as well):
There is a huge difference between doing something difficult and aligned with your personal values, and doing something difficult and not aligned with your personal values. Sure, we could spend our free time doing a million other easier things. But perhaps happiness is being able to choose your hard thing and then spend your time working on it. For now, parenting young children is my hard thing. I’m not terribly good at it, but I try… This is a precious time and I want to savor it before it ends.
You may think I’m crazy. That’s okay. Remember, the point is to live a life true to yourself and ignore what other people think. Now excuse me while I clean the vomit stain off my shorts.
I’ve been putting some side money into crowdfunded real-estate investments – see here and here – and I have decided to test out the quarterly liquidity window of my Fundrise eREIT investment (review). An important difference between most of these private real estate investments and publicly-listed REIT is liquidity. On most any given weekday, I can sell my public REIT (i.e. VNQ) for a price that an open market deems fair and within few days I will have cash in hand.
The Fundrise Income eREITs are private REITs that take advantage of new crowdfunding regulations open to all investors (not just accredited investors). The intended time horizon of this investment at least 5 years, but they also advertise “quarterly liquidity” as a feature (see below). I was interested to see how this feature worked, as many of the other asset-backed loans in which I am invested could take a year or longer to get my money back. I decided to test out this “emergency hatch”.
The rules. You are allowed to make a redemption request once per quarter. For the full details on Fundrise quarterly redemption plans, please see the section of each eREIT Offering Circular titled, “Description of Our Common Shares—Quarterly Redemption Plan” at this link. It’s pretty dense, and I will only highlight this table which includes the “early withdrawal penalty” imposed if you redeem your shares within 5 years.
In other words, if I redeem now after one year, I will pay a 3% penalty on the current net asset value (NAV). The NAV itself is a complex calculation of the underlying assets that I believe is only updated to investors once a quarter.
Note that you are not guaranteed to have liquidity of all your shares. If too many shareholders request liquidity at the same time, that might force them to sell assets at large discounts and harm other shareholders. Here is an excerpt from the Offering Circular:
Q: Will there be any limits on my ability to redeem my shares?
A: Yes. While we designed our redemption plan to allow shareholders to request redemptions on a quarterly basis, we need to impose limitations on the total amount of net redemptions per calendar quarter in order to maintain sufficient sources of liquidity to satisfy redemption requests without impacting our ability to invest in commercial real estate assets and maximize investor returns.
In the event our Manager determines, in its sole discretion, that we do not have sufficient funds available to redeem all of the common shares for which redemption requests have been submitted in any given month or calendar quarter, as applicable, such pending requests will be honored on a pro rata basis. […]
Redemption Process. The process of requesting a quarterly redemption was straightforward. Here’s a step-by-step rundown:
Complete Investment Timeline. Here’s a summary of cashflows from beginning to end.
Screenshot:
So I invested $2,000 and after 471 days I collected a total of $2,142.79 for a total gain of 7.14%. The annualized return works out to 5.49%. That’s not amazing but not bad considering that I am bailing out of a 5+ year investment after only a year. I’m confident that my returns would have been better if I waited out the full 5 years as real estate ownership investments take time to work out. (Traditional non-traded REITs are infamous for having huge penalties for early withdrawals where you get back less than 90 cents on the dollar.)
Hopefully this post answers some questions about the liquidity of Fundrise eREITs. I received my money, as requested, in about a month. If instant/daily liquidity is important to you, I would still stick with publicly-traded REITs.
Bottom line. The Fundrise Income eREITs are meant as long-term investments with time horizons of at least 5 years. However, they advertise the availability of limited quarterly liquidity. I tested out this liquidity feature and was able to cash out subject to a 3% discount from net asset value. It worked as promised, howewer I would not recommend using this option unless necessary as it will impair your overall return. Fundrise does warn you that in an extreme event with depressed prices, this liquidity window may be closed for the benefit of long-term investors. You can sign-up and learn about currently-available Fundrise eREITs here.
I joined the bandwagon and finished reading Grit: The Power of Passion and Perseverance by Angela Duckworth. (It’s not like I could just give up in the middle…) You’ve probably heard of this NYT bestseller. Either the book, the MacArthur fellow author, or the research discussed has been profiled in nearly every major media outlet. This makes sense due to its broad appeal, from dating/marriage to professional/career to parenting.
Instead of a traditional book review, I’ll try to relate the major conclusions from the book to the pursuit of financial indepedence and retiring early (FIRE).
Grit is both perseverance and passion. Perseverance is the act of trying or continuing to do something, even if it is difficult. Passion is a strong interest that aligns with your values, beliefs, and self-identity. This second part is sometimes overlooked or dismissed. You need both determination and direction. Sometimes it takes time to develop a passion, but nobody works doggedly on something they don’t love.
One test for passion is to ask yourself – Are you excited about the minutiae? I’m not sure how many people find themselves lost in though about withdrawal rate statistics, IRS publications on tax strategies, or optimal asset allocation. 🙂
Grit predicts success more reliably than talent. Research has also shown that talent is not correlated with grit. Talent is certainly still important. However, grit is just as, if not more important, than talent when it comes to success. While grit alone won’t make you an Olympic athlete, talent alone certainly won’t get you there either. When people idolize the idea of natural talent, it lets them off the hook in terms of achievement. “I couldn’t do that because I wasn’t innately talented enough, so it’s not my fault.”
Effort counts twice. Instead of the theory that talent produces achievement, Duckworth presents this alternative model.
Talent x Effort = Skill
Skill x Effort = Achievement
Talent is how quickly we can improve our skill. But you still need to apply effort to build that skill. Think of skills like cooking, throwing a football, writing, coding, or mathematical analysis. Next, effort makes that skill productive. You need effort again to become a successful chef with multiple restaurants, a quarterback with a record number of touchdown passes, an author of several books, or an engineer that designed important products. Effort counts twice.
Now, in terms of financial freedom, I would say the closest analogue to skill is income. To increase your net worth, you need to first make money. Your talents may or may not naturally align to making money. Applying effort with your talent creates income. Next, it’s not what you make, it’s what you keep. That takes saving, which is a different kind of effort. Thus, we can rewrite the equations as follows:
Talent x Effort (Working) = Income
Income x Effort (Saving) = Financial Freedom
Researcher Catharine Cox analyzed high-achieving historical figures and came to the conclusion that “high but not the highest intelligence, combined with the greatest degree of persistence will achieve greater eminence than the highest degree of intelligence with somewhat less persistence.” Perhaps we could also extend this to say a high (above-average) income but not the highest income combined with more grit is better than the highest income and less grit.
Enthusiasm is common. Endurance is rare. Nearly everyone thinks the idea of financial independence is great. Who wouldn’t want that? Only a fraction of people actually follow through with it. I really liked this quote from the book… “A high level of achievement is often an accretion of mundane acts.”
Goal hierarchies. Set a top level goal first, which lets you develop sub-goals, which leads to specific actions. Don’t spend your limited time on other unrelated and/or conflicting sub-goals. If a related sub-goal is not working, replace it with something different. Here’s a figure taken from a US Army whitepaper on Grit [pdf]:
Now, financial freedom may not be your top-level goal. But it might be related if you aren’t able to work on your top-level goal because you’re working 40 hours a week to pay the mortgage.
In any case, I think this diagram does a good job illustrating the concept that there are many ways to get closer to FIRE. You could advance in your career and grow your salary. You could build up a collection of rental units. You could move into a smaller house with a shorter commute. You could buy index funds. You could max out your 401(k). You could buy dividend stocks or REITs. You could create websites that create semi-passive income. If one way doesn’t work, you can try another.
You can improve your grittiness. Your grit isn’t fixed. Here are some ways you can get better:
Bottom line: When people think of early retirement, they often think of the 20-year-old Silicon Valley entrepreneur, a big inheritance, or the lottery ticket winner. This focuses on luck and talent – things you can’t control – and thus thinking you’ll never be able to do it yourself. In most cases, achieving financial freedom requires a lot of mundane acts over many years. Over time, you develop working skills that create an above-average income. Then you develop saving skills that create a large net worth. Luck and talent still matter, but you really need grit – the combination of perseverance and passion. The good news is that grit is something you can control and improve.
For more on this topic, take her Grit Scale test and also watch her TED Talk.
Update: As of 10/3/16, Amazon has changed their policy and now prohibits reviews in exchange for discounted products. From the Amazon Blog:
Our community guidelines have always prohibited compensation for reviews, with an exception – reviewers could post a review in exchange for a free or discounted product as long as they disclosed that fact. These so-called ‘incentivized reviews’ make up only a tiny fraction of the tens of millions of reviews on Amazon, and when done carefully, they can be helpful to customers by providing a foundation of reviews for new or less well-known products.
Today, we updated the community guidelines to prohibit incentivized reviews unless they are facilitated through the Amazon Vine program.
This the new language in their official Seller Policy:
Additionally, you may not provide compensation (including free or discounted products) for a review. Review solicitations that ask for only positive reviews or that offer compensation are prohibited. You may not ask buyers to modify or remove reviews.
Contrary to Amazon’s claims, incentivized reviews do not make up only a “tiny fraction” of all reviews. According to this ReviewMeta video, 50% of all new Amazon reviews are now incentivized! 20% of all the Amazon Reviews they analyzed are incentivized.
Will this make it better, or worse? In response, many sites still giving out free stuff but are now simply telling users that reviews are no longer “required” and you don’t have to add any disclaimer at all. But, the sellers can usually still CHOOSE which people are eligible to receive the discounted products. Do you think they will give out free products to people who leave mostly positive reviews, or those people who take stuff and do nothing? Hmmm.
Original post:
For while, I was convinced that one day I would only shop at two places: Costco and Amazon. But recently, I’ve been concerned that Amazon’s quest for growth has hurt their customer-centric reputation. Here’s one part in what unfortunately may become a multi-part series.
Discounts for reviews. In the past, I wrote about a few websites that provided you with discounted products from Amazon in exchange for an “honest review”. I originally felt that since Amazon itself does this type of thing with its Vine program, it should be fine for the makers of a product to send out a few samples for review.
In the months since, I’ve gradually changed my mind. This practice is no longer a way to “jumpstart” your product with a few reviews. Instead, it has basically resulted in a race to the bottom where other sellers feel they must give out tons of free product and end up with hundreds of 5-star reviews with the disclaimer “I received this product at a discount in exchange for an honest and unbiased review.” This screenshot from Reddit is a perfect example of the bottom of this downward spiral:
ReviewMeta.com analyzed 7 million reviews and found that the reviews with disclaimers had nearly all 4 and 5 star ratings, with a much lower occurrence of 1 and 2 star ratings.
I think where I messed up was that when a regular website like CNET does a gadget review, they have a readership and reputation to maintain. An anonymous individual is probably busy and just wants to satisfy the review requirement in order to keep getting discounted stuff. There is no feedback system to keep them accountable.
Fake reviews. What’s worse is that some reviews are simply fake with no such disclaimer. As someone who has to deal with spam comments every day, I see the same language patterns in Amazon reviews. Another website called FakeSpot.com also analyzes the quality of reviews:
Fakespot utilizes numerous technologies to validate the authenticity of reviews. The primary criteria is the language utilized by the reviewer, the profile of the reviewer, correlation with other reviewers data and machine learning algorithm that focuses on improving itself by detecting fraudulent reviews.
Check out this Micro SD memory card, and see it’s FakeSpot analysis.
ReviewMeta adjusted their 4.8 star rating down to 1.3 stars:
Survivorship bias. As someone who has bought a few “discount-for-review” items in the past (I no longer participate), I can tell you that when I left a less-than-positive review and others did as well, the item simply disappeared from Amazon shortly thereafter. It’s quite easy for a factory to simply slap on another made-up brand name and thus create a separate, new listing. This makes it quite easy to just start over, seed with positive reviews, and keep selling until too many “real” reviews start lowering the average rating. Repeat as necessary.
As always, buyer beware. Amazon has already filed some lawsuits over paid fake reviews, but they still have a lot of room to improve.
“Do what you love and you’ll never work a day in your life.” We’ve all read this saying, and it certainly sounds like a wonderful goal. But is it also being abused by corporate interests? Here’s why I might change it to “Do what you love, if you can work for yourself.”
Miya Tokumitsu has a new book called Do What You Love: And Other Lies About Success & Happiness, recently profiled in this Atlantic article and initially sparked by this older Slate article. I haven’t read the book, but the overall theme is that if everyone is supposed to be happy and passionate, then they can’t really complain about long hours or low compensation. Advantage: Employers.
There is a lot of difficult, boring, yet necessary work to be done out there. The author Tokumitsu wants you to ask: “Why should workers feel as if they aren’t working when they are?”, and “Who, exactly, benefits from making work feel like nonwork?”
One solution is to make the person who benefits from your passion YOU. That is, if you can, find your passion and eventually start your own business from it. Even if you aren’t the sole owner, you should have a strong vested interest your investment of hard work.
If you can’t, perhaps you should treat your job as just work. Be proud of doing work you don’t love in order to feed and provide security for your family. There is honor is that as well.
Derive joy from what you love in your off-hours, and derive money from your work – and invest that money into assets towards financial independence! I think of financial independence less in black-and-white and more in grey these days. The more income you have from investments, then the more likely you can switch to a job that you enjoy (as such jobs tend to pay less). Alternatively, you could keep your non-passionate work and simply work less hours.
I’ll end with some quotes I have saved recently about finding passionate work. From the book The Martha Rules: 10 Essentials for Achieving Success as You Start, Build, or Manage a Business:
Build your success around something that you love — something that is inherently and endlessly interesting to you.
From The Atlantic article: Why So Many Smart People Aren’t Happy
Ultimately, what we need in order to be happy is at some level pretty simple. It requires doing something that you find meaningful, that you can kind of get lost in on a daily basis.
Even I find it peculiar at times, but I can totally get lost in learning about investing and personal finance. Hours can pass in what feels like minutes. I don’t know if it will be endlessly interesting, but this has been going on for over 10 years now, so I’m taking that as a good sign!
This Narratively “longread” about the history behind the hip Bi-Rite Market in San Francisco’s Mission District was an intriguing father-son story.
Part of it involved entrepreneurial parents trying to pass on important financial skills to their children, like this excerpt involving the father Ned:
Every day, a group of homeless would line up outside the store, and Ned would feed them a sandwich and soda. No questions asked; no thank you needed. He was generous to his kids, too, but not without strategy or purpose. He’d pay them twenty dollars a day for their work at the market, a decent wage in the ’70s. If the kids agreed to save their earnings in the bank, Ned would double it. If they didn’t, that was all they got. Over the years, each child managed to save $20,000, thanks to Ned’s matching practice. “That’s how I encourage them to work and save money,” Ned says. “Sometimes you have to do your tricky things if you love your children.”
I found it amusing that when his son Sam decided to start his own small business, instead of worrying about him going broke, that actually made him feel more at ease.
“He was excited that I was going to be in control of my own destiny, even though it was a restaurant,” says Sam. “Pursuing entrepreneurship was following a path that he knew, that he was comfortable with.”
I would think most parents would rather their kid go the “safe” route of relying on a professional degree like lawyer, doctor, finance, or engineer.
I enjoy collecting anecdotes like this. Here are past related posts:
While catching up on some reading, it was refreshing to see Bill Gates offer a more positive spin with his Top 6 Good-News Stories of 2015. One of them was that the College Board announced free, high-quality SAT practice at Khan Academy.
This past June, the company that created the SAT helped the Khan Academy launch a free online learning portal for any student who wants help getting ready for the SAT or PSAT. Check out the site for yourself. If you’re like me, you’ll look at these interactive tools and video lessons and wish they had been around when you were in high school. I’m very excited about this development because of what it means for kids who can’t afford expensive test-prep classes and tutors.
The interactive software offers both short diagnostic quizzes and full exams, along with feedback and interactive tutorials to make improvements. Apparently, the SAT is being revamped again in March 2016 and reverting back to the older 1600 point scale + optional essay. Ah, fun times.
After you spend enough time consuming financial media week after week, you start seeing patterns in the noise. I understand why of course, as creating content to feed the beast can get quite exhausting. But hopefully, by pointing out these out, you as an individual investor can realize that there may or may not be any substance behind the marketing buzzwords and short-term forecasts. Entertaining? Yes. Useful and actionable? Much less likely.
A good analogy would be with the classic word game Mad Libs, where “one player prompts others for a list of words to substitute for blanks in a story, before reading the – often comical or nonsensical – story aloud.”
Here’s how the usual “Profile of successful mutual fund manager” article usually goes. I am paraphrasing myself in 2006.
[Name of recently successful mutual fund manager] may not look the part, but at the helm of [formidable sounding firm], his [mutual fund name] has outperformed its benchmark by [big number]% annually over the past 5 years. The key is to [something skill-based like “on-the-ground” human research or complex computer algorithms] and also [something classic like “long-term perspective” or “focus on the fundamentals”]. As a result, the manager says that people should [something vague and simple for the Average Joe investor].
There are also the marketing materials coming directly from the firms themselves. Here’s an actual quote taken from a 2008 fund brochure. I’ve bolded the buzzwords for your convenience:
The OIM Core Plus Fixed Income strategy is rooted in the idea that individual security selection produces the best opportunity for risk-adjusted excess returns over time. Through an extensive, bottom-up research process, our portfolio management team focuses on optimal bond selection of investment grade corporate bonds, mortgage-backed securities, US Government Treasuries and taxable municipal bonds. The team employs a tightly controlled duration discipline and closely manages all portfolio risk factors. The portfolio management team’s objective is to produce predictable, consistent excess returns net of fees over the Barclay’s Capital Aggregate Bond Index.
The Oppenheimer Core Plus fund was supposed to be very conservative and was marketed to those with children within 5 years of college. What happened next? It proceeded to lose 38% of its value in 2008, while the fund’s benchmark actually rose 5.24%.
Barry Ritholz probably digests more financial media than 99.9% of folks out there, and in a recent WaPo article he pretty much nails the average CNBC guest who gets the question “Where’s the Dow going to be in a year?”:
“Our view is that the economy in the U.S. continues to _______, and we foresee _______ problems overseas ______. China is _______, and that has ramifications for the Pacific Rim’s ______. Greece is ______ in Europe. The commodity complex is causing _____ for emerging markets. But many sectors of the U.S. economy remain _______, and some sectors overseas are still _______. The valuation issue continues to be _____, and that means _____ for investors. That has ramifications for corporate profits that will be ______. We think the economy is going to do ______, and you know that means inflation will be _____, which will force interest rates to ______. Under these conditions, the sectors most likely to benefit from this are ______, ______ and ______. The companies best positioned to take advantage of this are ____, ____ and ____. Based on all that, we especially recommend an overweight allocation to ____, ____ and ____. Thus, we believe the Dow will be at ______ next year.”
There are good mutual fund managers, good financial reporters, and good hedge fund managers out there trying to do the right thing. But the problem is that when you see such meaningless words and phrases, you just can’t tell if they are good or bad. Next time you watch CNBC, Fox Business, or Bloomberg TV, see if you can match up the blanks and buzzwords. Thanks to reader CJ for the Ritholz article tip.
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