Book Review: A History of Gold in the United States

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Having been born after 1971, I have never lived in a time when the dollar was backed by gold. In an effort to learn more about the gold standard, I recently finished One Nation Under Gold: How One Precious Metal Has Dominated the American Imagination for Four Centuries by James Ledbetter. In other words, this is a history of gold in America. Here are my overall takeaways:

I always thought that the pre-1971 gold standard meant that for every dollar printed, there was a certain amount of gold set aside in a vault. This turns out to be false. A long time ago, gold coins actually circulated as currency. But the more modern version of a gold standard simply means the government agrees to sell gold bullion on demand at a fixed dollar price (ex. $35 for an ounce of gold).

Under the gold standard, countries rarely had enough gold in their vaults to cover if everyone decided to redeem their currency. As a result, countries including the United States were constantly worried about running out of gold and used various political tricks to prevent too many redemptions. If the fixed ratio was $35 an ounce and people could get the equivalent of $36 an ounce somewhere else, there would be a big spike in demand and the US would have to ship out tons of gold. If the vaults went empty, that could cause a financial crisis. The system was constantly under stress.

Every major currency has ended up being forced off the gold standard, usually in times of severe stress. Wars. International trade deficits. Economic depressions. In 1933, the US government was again running low on gold and so they devalued from $20.67/oz. to $35/oz (a devaluation of over 40%). In addition, they banned domestic individuals from owning gold from 1933-1974. (Hmmm… a gold standard where you couldn’t actually get gold…) In 1971, with both the Vietnam War and ongoing trade deficits, Nixon ended international convertibility of the US dollar to gold.

I’ve read that every fiat currency in history has eventually failed. Well, it’s also true that every gold standard in history has eventually failed. Just a thought that kept running through my head while reading this book. Gold-backed currency has its own set of problems.

Harry Browne: Wise investment mind or paid salesman for gold industry? You may have heard of Harry Browne as the creator the Permanent Portfolio: 25% stocks/25% cash/25% long-term bonds/25% gold. Well, this book mostly mentions Browne as a shady doomsday salesman for the gold industry. He wrote books that promoted a specific gold company (Pacific Coast Coin Exchange) and then got paid $100,000 (~$600,000 in 2017 dollars) by that company. That’s not all… The SEC shut down PCCE for having no actual gold in vaults and instead buying things like private jets with the money. Here is a 1974 NY Times article about the company.

The chance that the US goes back on a gold standard is very, very, very small. The gold standard did restrict governmental power, and some people like the sound of that. However, governments like having the ability to expand and contract the money supply to overcome stressful events like war and economic recessions. Will they wield that power wisely and effectively? Mistakes will be made, but I don’t see how they will voluntarily give up that flexibility. The question is not whether fiat currency is perfect, it is about which is better amongst imperfect options.

In the end, perhaps it is better that there is an open market for gold. Today, individuals can exchange gold for dollars and dollars for gold whenever they want. Gold ETFs let you buy gold with few clicks and lower transactional costs than physical gold. If you like market-cap weighting, consider a 1% gold portfolio.

I’m not a history buff in general, and perhaps that is why I found this book rather dry and hard to finish. There is no flowing narrative like a Michael Lewis book. However, I felt like I did learn some useful lessons and I’m glad I finished it.

Barking Up The Wrong Tree: The Benefits of Being Mostly Optimistic

barkingEric Barker writes at Bakadesuyo.com and his talent/skill is synthesizing hundreds of different sources of academic research and historical anecdotes into actionable ways to improve your life. That’s kind of a crowded field these days, but I enjoyed reading his book which combines a lot of his past work: Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong.

If I had to sum up this book in one word, it would be “nuanced”. Be nice but not too nice. Work hard but not too hard, especially on one single area of your life. Grit is good, but time is finite. Thus, quitting and working on a better thing instead can also be good. Is it better to be an extrovert or introvert? It depends. (The book details why.) With so many tips and examples, this was one those books that kept my attention when reading it, but after I finish I had trouble remembering something specific to carry with me.

After looking back on my notes, I decided to make this my takeaway: Be mostly optimistic. For the most part, being optimistic opens you up to more opportunities that more than offset any failures. If I had to use a number, be 80% trusting, 80% optimistic. However, don’t be 100% trusting as that opens you up to abuse. Here are some examples.

Your great weakness may also be your greatest advantage. Consider what makes you unique, and look at it optimistically. You might not make a lucrative career out of your quirks, but it’s still your best shot. You have to align your life and environment to maximize your differences. If you love working within structure, use that. If you need to blaze your own path and can’t stand structure, use that. If you happen to love one thing 1,000x more than anything else, well you better get on that.

Prisoner’s dilemma. This game theory experiment involves two individuals faced with the decision of whether to trust or betray the other person (from Wikipedia):

Two members of a criminal gang are arrested and imprisoned. Each prisoner is in solitary confinement with no means of communicating with the other. The prosecutors lack sufficient evidence to convict the pair on the principal charge. They hope to get both sentenced to a year in prison on a lesser charge. Simultaneously, the prosecutors offer each prisoner a bargain. Each prisoner is given the opportunity either to: betray the other by testifying that the other committed the crime, or to cooperate with the other by remaining silent. The offer is:

If A and B each betray the other, each of them serves 2 years in prison
If A betrays B but B remains silent, A will be set free and B will serve 3 years in prison (and vice versa)
If A and B both remain silent, both of them will only serve 1 year in prison (on the lesser charge)

As one of these prisoners, what would you do? What if you had to do it 20 times in a row? You could always trust. You could always betray. You could do something in between. It turns out that a really simple algorithm does nearly best overall: tit-for-tat. The strategy is simply to cooperate on the first iteration of the game; after that, do what your opponent did on the previous move. If they trust, then you trust. If they betray, then you betray.

You know what is a even a little bit better? Tit-for-tat plus occasional forgiveness. Once in a while, you should trust again even if they betrayed last time. This stops a negative feedback loop of repeated betrayals.

The lessons: Start out nice (be optimistic!) and hope to stay nice, but don’t be a doormat if abused in return. Be consistent. Forgive once in a while.

Optimist vs. Pessimist explanatory style. The book includes an interesting contrast as to how each would react to a setback. Pessimists tell themselves that bad events:

  • will last a long time (I’ll never get this done)
  • are universal (I can’t trust any of these people)
  • are their own fault (I’m terrible at this)

Meanwhile, optimists tell themselves that bad events:

  • are temporary (This happens occasionally, tomorrow will be better)
  • have a specific cause (It is just because the weather is bad today)
  • are not their own fault (I’m good at this, but today wasn’t my lucky day)

It is suggested that you can indeed change your natural optimism/pessimism levels by altering your explanatory style.

This is not to say that you should be only optimistic. Here’s a good post exploring the pros and cons of both sides. The overall conclusion:

The majority of the time, think positive. Happiness and health trump pretty much everything else. There are situations where negativity can help, like when we’re making high-stakes plans or trying to improve skills.

Be optimistic socially. Even if you aren’t a natural extrovert, you can still build your network in a positive way without being sleazy. Meet new people by finding shared interests and/or shared challenges. Help others first when you can, without expecting anything in return. Most people are good and will look to reciprocate. Join groups. Try to maintain contact.

Luck school = try new things. Dr. Richard Wiseman studied “lucky” people and found that the most important characteristic of lucky people is that they are much more likely to just try new stuff, which opens them up to opportunity. In other words, luck wasn’t random; it was due to choices. So he started a “Luck School”, teaching a group of people to act more like lucky people. It worked. Yes, trying more being failing more too, but people tend to regret a failure to act, while the failures didn’t really do any damage. You can often learn from failure, anyway. Finally, we tend to remember the good things and forget the bad. (This selective memory is probably why I have three kids.)

Bottom line. Being mostly optimistic appears to be the best available strategy for many things in life. Try a lot of new things. Meet new people. Optimists are more likely to create opportunities for career success and personal happiness. You will also fail more, but those failures don’t tend to cause permanent damage. Optimism is even associated with better health and longer lifespans. Don’t go overboard. Don’t be a overly-trusting doormat, and don’t be dangerously overconfident. Think 8/10 optimistic. (I’m not naturally this optimistic, so I’ll have to consciously try and change my attitude and explanatory style.)

University of Berkshire Hathaway: Notes From Annual Shareholders Meeting (Book Review)

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If you are a Buffett & Munger follower, you should be intrigued by University of Berkshire Hathaway: 30 Years of Lessons Learned from Warren Buffett & Charlie Munger at the Annual Shareholders Meeting by Daniel Pecaut and Corey Wrenn. Anyone can buy all the old BRK shareholder letters, but there are very few transcripts from the live shareholder meetings in Omaha, Nebraska (1986–2015). There is definitely overlap, but these live interactions sometimes provide a peek into their less-publicized opinions (especially Munger’s). Here’s how the authors describe the book:

This book isn’t for the first-time investor. It’s for the informed investor who sees the value of being able to get deep into the mindsets of Warren Buffett and Charlie Munger. If you want to walk around in their shoes for the past three decades, absorb what works, and then apply it to your own investments, then this book is for you.

The current price is only $0.99 in Kindle format. At that price, it should be an easy decision on whether to own the entire book forever, but here are my personal notes and highlights to give you an idea of the contents:

How Berkshire Hathaway differs from other actively-managed stock mutual funds:

The public has long viewed Berkshire as a sort of mutual fund with large stock holdings. This view underestimates or ignores 1) Berkshire’s insurance companies’ impressive generation of low-cost float, 2) Berkshire’s impressive and growing stable of cash-generating operating businesses, and 3) Berkshire’s ability to orchestrate value-enhancing deals.

Classic quote on stock market prices:

Buffett noted that many investors illogically become euphoric when stock prices rise and are downcast when they fall. This makes no more sense than if you bought some hamburger one day, returned the next day to buy more but at a higher price, and then felt euphoric because you had bought some cheaper the day before. If you are going to be a lifelong buyer of food, you welcome falling prices and deplore price increases. So should it be with investments.

Luck and the Ovarian lottery:

Buffett launched into an intriguing thought problem he called “the ovarian lottery.” You are to be born in 24 hours. You are also to write all the rules that will govern the society in which you will live. However, you do not know if you will be born bright or retarded, black or white, male or female, rich or poor, able or disabled. How would you write the rules? Buffett said how one comes out in this lottery is far more important than anything else to one’s future. He and Munger were huge winners having been born American (“in Afghanistan, we wouldn’t be worth a damn”), male (at a time when many women could only be nurses and teachers), white (when opportunities for minorities were slim) and good at valuing businesses (in a system that pays for that like crazy). Buffett noted it is important to take care of the non-winners of the ovarian lottery. Therefore, some sort of taxation is in order. Given that few people with money and talent are turned away from free enterprise under the current system, the 28% capital gains tax is probably okay.

Investing in yourself:

Buffett asserted that the very best investment you can make is in yourself. Buffett shared that, when he talks to students, one of the things he tells them is what a valuable asset they have in themselves. Buffett would pay any bright student probably $50,000 for 10% of their future earnings for the rest of his life. So each student is a $500,000 asset just standing there. What you do with that $500,000 asset should be developing your mind and talent.

State-sponsored legal gambling:

Buffett asserted that to a large extent, gambling is a tax on ignorance. You put it in, and it ends up taxing many that are least able to pay while relieving taxes on those who don’t gamble. He finds it socially revolting when a government preys on its citizens rather than serving them. A government shouldn’t make it easy for people to take their Social Security checks and waste them by pulling a handle. In addition, other negative social things can flow from gambling over time.

Read, read, read:

Buffett agreed that he is big on reading everything in sight and recommended good investors should read everything they can. In his case, he said that by the age of 10, he’d read every book in the Omaha public library on investing, some twice! Fill your mind with competing ideas, and see what makes sense to you.

Investing with real money:

Then you have to jump in the water—take a small amount of money, and do it yourself. He joked that investing on paper is like reading a romance novel versus doing something else. Munger shared that Berkshire Director Sandy Gottesman, who runs a large, successful investment firm (First Manhattan), asks interviewees, “What do you own, and why do you own it?” If you’re not interested enough to own something, then he’d tell you to find something else to do.

Book recommendations, including The Richest Man in Babylon:

We have often recommended to our friends and clients George Clason’s classic, The Richest Man in Babylon, so we were delighted to hear Charlie speak of it. He said that he read the book when he was young and that the book taught him to under-spend his income and invest the difference. Lo and behold, he did this, and it worked.

Munger also suggested that it is very important to learn how to avoid being manipulated by lenders and vendors. He strongly recommended Robert Cialdini’s book, Influence, for the task. He also recommended Cialdini’s newest book, Yes, noting that Cialdini is the rare social psychologist who can connect the world of theory and daily life.

Note: This a dated quote, and Robert Cialdini’s newest book is actually Pre-Suasion: A Revolutionary Way to Influence and Persuade, published in 2016.

Work for yourself an hour each day:

He got the idea to add a mental compound interest as well. So he decided he would sell himself the best hour of the day to improving his own mind, and the world could buy the rest of his time. He said it may sound selfish, but it worked. He also noted that if you become very reliable and stay that way, it will be very hard to fail in doing anything you want.

Simple career advice:

“Do what you enjoy the most. Work for people you admire. You can’t miss if you do that.”

Investing in stocks (equity) vs. bonds (debt):

Buffett noted that the analytical hurdle for buying a bond requires answering the question, “Will the company go out of business?” while buying an equity requires answering the more difficult question, “Will the company prosper?” This is why Berkshire bought the 15% notes of Harley Davidson rather than the stock. He had no question the company would stay in business, quipping, “You have to like a business where the customers tattoo your name on their chests!” But gauging Harley’s long-term prosperity was much more difficult, especially during the throes of the crisis.

Also see my earlier posts on appreciating your absolute standard of living and why you should maintain some optimism.

Bottom line. If you’re a Buffett & Munger enthusiast, this is a nice addition to your collection. Lots of familiar wisdom but also includes some additional perspective. If you’re not a Buffett & Munger enthusiast, I might start elsewhere, for example with Warren Buffett’s Ground Rules if you’re not ready for the original shareholder letters. Here’s to hoping the authors will do a similar book on the Wesco Financial meetings with Charlie Munger.

What if the North Pond Hermit Has Pursued Early Retirement Instead?

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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.

Shoe Dog by Nike Founder Phil Knight: A Great Audiobook

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As a kid in the late 1980s, I admit that I yearned for a pair of Nike Air shoes. I’d doodle shoes with that AIR logo and visible air pocket. I still remember the day I finally got a pair. They were an ugly blue-suede color from the bottom of some bargain bin, but they were only $34.99 and they were mine.

As Nike was already huge by then, I never had any curiosity about the early years of Nike. I only started listening to Shoe Dog: A Memoir by the Creator of Nike by Phil Knight after seeing it mentioned as Warren Buffett’s “favorite book of 2016” in his Berkshire Hathaway annual letter.

While I usually prefer reading physical books since I like to write notes and make highlights, this book seemed more like a story so I decided to listen to it as an audiobook. That turned out to be a good decision. (Right now, Audible is offering two free audiobooks as part of its free trial. As with all Amazon trials, it’s easy to cancel. The other book I picked was When Breath Becomes Air.)

Here are some quick notes that I took (less than usual due to it being an audiobook) along with some of my favorite quotes (you can mark notable places with the app and then go back).

Phil Knight was on the University of Oregon track team. He ran for fun and would have kept running even if he never owned a shoe company.

I’d been unable to sell encyclopedias, and I’d despised it to boot. I’d been slightly better at selling mutual funds, but I’d felt dead inside. So why was selling shoes so different? Because, I realized, it wasn’t selling. I believed in running. I believed that if people got out and ran a few miles every day, the world would be a better place, and I believed these shoes were better to run in. People, sensing my belief, wanted some of that belief for themselves. Belief, I decided. Belief is irresistible.

He was a visionary, but not necessarily how you think. Knight first sold imported shoes from Japan – Tiger by Onitsuka. In fact, he only started Nike after Tiger threatened to pull his distribution rights. He didn’t start with “Air Jordans” and “Just Do It” fully-formed in his mind. He was more of a warrior/competitor that just kept on fighting.

Nike’s success was not at all guaranteed. Knight had to maintain a full-time job as an accountant while running his company on the side. There were many hiccups and struggles and lawsuits, each of which could have bankrupted the young company.

I’d like to remind them that America isn’t the entrepreneurial Shangri-La people think. Free enterprise always irritates the kinds of trolls who live to block, to thwart, to say no, sorry, no. And it’s always been this way. Entrepreneurs have always been outgunned, outnumbered. They’ve always fought uphill, and the hill has never been steeper. America is becoming less entrepreneurial, not more.

Knight never used this word, but he appeared to be more of an introvert than an extrovert. He wasn’t a natural salesman or self-marketer. He didn’t like advertising. He developed a strong core of extremely loyal people at Nike. He was not a micro-manager.

Don’t tell people how to do things, tell them what to do and let them surprise you with their results.

Thoughts on becoming rich:

When it came rolling in, the money affected us all. Not much, and not for long, because none of us was ever driven by money. But that’s the nature of money. Whether you have it or not, whether you want it or not, whether you like it or not, it will try to define your days. Our task as human beings is not to let it.

On luck:

Luck plays a big role. Yes, I’d like to publicly acknowledge the power of luck. Athletes get lucky, poets get lucky, businesses get lucky. Hard work is critical, a good team is essential, brains and determination are invaluable, but luck may decide the outcome. Some people might not call it luck. They might call it Tao, or Logos, or Jñ?na, or Dharma. Or Spirit. Or God.

On why he finally shared this personal memoir:

I’d like to share the experience, the ups and downs, so that some young man or woman, somewhere, going through the same trials and ordeals, might be inspired or comforted. Or warned. Some young entrepreneur, maybe, some athlete or painter or novelist, might press on. It’s all the same drive. The same dream.

Finally, some career advice:

I’d tell them to hit pause, think long and hard about how they want to spend their time, and with whom they want to spend it for the next forty years. I’d tell men and women in their midtwenties not to settle for a job or a profession or even a career. Seek a calling. Even if you don’t know what that means, seek it. If you’re following your calling, the fatigue will be easier to bear, the disappointments will be fuel, the highs will be like nothing you’ve ever felt.

Another anecdote that showed his honesty was that although he regrets not being able to spend much time with his young children, he also admits that if he had the chance he would do the same thing all over again.

There are many other worthy highlights in this book. I definitely recommend Shoe Dog for people interested in the origin story of Nike, entrepreneurialism, global business, and as interesting autobiography.

Daily Rituals Book Review: Daily Habits of Famous Creators

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I’ve always liked this quote commonly attributed to Aristotle (while the specific wording was probably paraphrased by Will Durant):

We are what we repeatedly do. Excellence then is not an act but a habit.

Did you ever wonder what the average day was like for Mozart, Beethoven, Benjamin Franklin, Ernest Hemingway, Jane Austen, Mark Twain, Albert Einstein, or Maya Angelou? Daily Rituals: How Artists Work by Mason Currey evolved from the Daily Routines blog and includes tightly-edited profiles of 161 notable individuals including writers, philosophers, composers, painters, mathematicians, and scientists.

If you were hoping to learn some secret “life hacks” from this book, you’ll probably be disappointed. I didn’t find anything that fit that description. In fact, you might actually be disappointed at how ordinary their days were. The great human creations of the world didn’t just spring fully-formed from their heads, at times it took several years of daily effort to create them. “A high level of achievement is often an accretion of mundane acts.

Instead, all you can really do is take away what fits with your own quirks and tendencies. Here’s what I felt was most applicable to my own life:

  • Figure out what part of the day is the most productive for you, and then zealously guard that time. Make sure that your environment is ideal for productivity during that precious period each day. Some people have detached studios, some have “Do Not Disturb” signs. I have noise-cancelling headphones.
  • Some people are night owls. Some people work solely in the mornings, from dawn to noon. Many people switched from being night owls to working in the mornings, often after having kids. I have experienced this transition as well.
  • Don’t forget to make time for rest and relaxation. Some visited cafes or bars. Many of the artists took long, daily walks outside. This follows the current trend of mindfulness and meditation to counter the constant electronic noise.
  • Many artists used some sort of drug each day… or multiple doses… or multiple drugs. This includes caffeine, alcohol, tobacco, and amphetamines (many of which were legal for a long time). This is not a recommendation, just an observation. Well, at least it makes me feel better about my recently developed coffee habit.
  • Some only created when they felt inspired, but they would still have a routine to encourage creativity. They might talk to specific people, visit certain places, or take a certain drug. Many could afford to wait around for inspiration because they had the financial means and their spouse or staff cooked, cleaned, and watched the children. Others fit in their work whenever they could, in between work and household tasks.
  • Others forced themselves to sit down every day and had a daily quota in mind. Some people do better when they treat it like a “normal” job. They get dressed, they go to an office, and they do their work. Maya Angelou rents out a cheap hotel room every day she writes. Stephen King has a daily quota of 2,000 words.

I’ll end with a few highlighted excerpts that I want to remember. I already mentioned how William James espoused the power of automation in the 1800s. The book also included this snapshot of Benjamin Franklin’s daily schedule. Finally, I enjoyed this excerpt about author Anne Rice (b. 1941):

For her first novel, Interview with the Vampire, Rice wrote all night and slept during the day. “I just found it the time when I could concentrate and think the best,” she says. “I needed to be alone in the still of the night, without the phone, without friends calling me, with my husband sound asleep. I needed that utter freedom.” But when her son was born in 1978, Rice made “the big switch” to daytime writing and has continued to work that way for most of her career. […] “What you have to do is clear all distraction. That’s the bottom line.”

This book mostly included artists of one type or another, but I think a good routine can apply to all part of life. I don’t see that much difference between writing a book and creating a new small business that sells handmade items on a custom website (or really anything where you work for yourself). You are still making something new, and you should create the best environment in which to do so.

Grit, Early Retirement, and Financial Freedom

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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]:

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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:

  • Explore different interests. A passion doesn’t just appear instantly. Read some different perspectives. See which one fits you. Some people focus on entrepreneurship and starting a successful business (make more money). Some focus on frugality and controlling household expenses (spend less money). Some focus on investing (make the difference grow faster).
  • Deliberate practice. You should force yourself outside your comfort zone. It should be at least a little hard! Focus on your weaknesses, try to improve, get feedback, try to improve some more. Acquire a habit of discipline.
  • Focus on a higher purpose. Cultivate meaning. To reach FIRE, you need a good job that you find worth doing. You need purpose. If you don’t like your job, try to reflect on your existing work can help society. Are you a bricklayer, or someone building a school to teach children or a church to serve God? Alternatively, change or alter your work to match your own interests and values.
  • Find a good role model or mentor. Someone you can talk to and get constant feedback from is best, but sometimes you have to settle for books or blog authors. Ideally, they should also inspire hope.
  • Use group conformity and the power of culture to your benefit. Merge your goals with your self-identity. Join local groups or online forums with people with similar interests. Each has a different culture, be it Early Retirement Forums or Mr. Money Mustache Forums or Bogleheads.

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.

Vagabonding: An Uncommon Guide to the Art of Long-Term World Travel (Book Review)

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I don’t recall how I discovered this book, but I remember being initially skeptical. I was wary that Vagabonding: An Uncommon Guide to the Art of Long-Term World Travel by Rolf Potts would be a poorly-written eBook with a very catchy title and little else. I’m glad to report that instead, this compact book was a nice mix of inspirational philosophy and practical advice.

What is Vagabonding? Vagabonding is defined by the book as taking time off from your normal life – from six weeks to four months to two years – to discover and experience the world on your own terms. Vagabonding focuses more on growing your self, while “vacation” is more about resting and preparing yourself for coming back to work. Stretching your boundaries always involves a certain level of discomfort. Put another way, you can’t buy vagabonding as a package deal (58% off!!) from a vacation wholesaler.

Do you even want to do this? I think this is the most important question. Reading this book is a good way to see if you would actually like to do long-term travel. By skipping the tour guides and charter buses, you’ll actually need to interact with strangers and locals. You will arrange your own transportation, order your own food, carry your own bags, and start your own conversations. While you should try your best to be safe, it won’t be perfect. Occasionally, you will look foolish or be ripped-off. Potts reminds you that this is a time-honored tradition for travelers, and at least you’ll have a story to tell.

This will either sound awful, or it will sound awesome. Will you feel the wanderlust?

Can I do this? This is an easier question. In terms of hard numbers, you’ll need to budget about $750 to $1,000 a month. To me, the overall message of the book is that yes, you can, as long as you want to do it.

  • Vagabonding is easier than you think. You must, however, loosen your grip on the certainties of life.
  • It costs less than you think. Visit lower-cost countries. Stay in hostels or AirBNBs. Eat like locals at street vendors and food stalls.
  • You need less stuff than you think. He provides tips, although there are many online resources about packing light.
  • You need less planning than you think. In fact, you shouldn’t plan everything ahead of time. Slow down. Move deliberately. Make choices as you go.
  • You are simpler than you think. Long-term travel helps you strip away all of the the rituals, routines, and possessions you’ve accumulated.

Parallels with early retirement and financial freedom. Many of the themes that came up aligned with my own thoughts about the pursuit of financial freedom.

  • It’s not for everyone, only you know if you feel the calling. This motivation is critical, as there will be speed bumps ahead.
  • You must put in some serious effort and savings discipline in order to make it happen. The good news is that this hard work will make you appreciate your eventual freedom even more.
  • 80% of people never even consider the possibility of vagabonding or early retirement. They will quickly dismiss long-term travel as too exotic or too expensive for them to accomplish. 15% of people may consider it, but never actually seriously pursue it. Less than 5% will pursue and achieve it. (I made up these numbers.)
  • Inevitably, some of your friends and neighbors will scoff at the idea as either impossible and/or foolish.
  • In the end, it requires you to take a leap of faith by quitting or at least taking an extended leave of absence from your job. You must trust that “it will be okay”.

The book also includes some great quotes from other travelers. A sampling:

Travel can be a kind of monasticism on the move: On the road, we often live more simply with no more possessions than we can carry, and surrendering ourselves to chance. This is what Camus meant when he said that “what gives value to travel is fear” – disruption, in other words (or emancipation), from circumstance, and all the habits behind which we hide. – Pico Iyer

Suddenly you are five years old again. You can’t read anything, you only have the most rudimentary sense of how things work, you can’t even cross a street without endangering your life. Your whole existence becomes a series of interesting guesses. – Bill Bryson

Who are you that wanted only to be told what you knew before? – Walt Whitman

vagabonding0I borrowed an original 2002 copy from the library for this review, but after reading it I decided to order the “revised and updated” 2016 version from Amazon. There are many passages and other tidbits that I will want to refer back to later. I went ahead and bought a new copy, as I wanted to guarantee myself access to the new material. If I bought it used, I may have gotten the older version again, as the new version isn’t being called a 2nd edition and has the same old ISBN.

Bottom line. If you are curious about long-term independent travel, you should read this short book for a mix of motivational thoughts and down-to-earth advice. Good stuff and a lot cheaper than doing the actual thing. 🙂

Warren Buffett’s Ground Rules: Do-It-Yourself Investing Guidelines

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Okay, so you probably aren’t reading a book titled Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor if you are perfectly happy owning solely index funds forever. While the shared concepts with low-cost, passive investing still apply, here are things to consider if you want to do some of your own picking and choosing between individual stocks and bonds.

Given how much energy an 86-year-old Buffett seems to have, it must have been very interesting to invest with him as a hungry young man. On the other hand, reading through the partnership letters also shows how mature he was in his late 20s and early 30s.

Be honest with yourself. Pick a yardstick ahead of time. You need to pick a proper benchmark against which to measure your performance, not just having positive or negative years. Back in 1966, it was the Dow over the last 3 years. Note that it wasn’t just an index, but also a timeframe of at least 3-5 years.

If you’re going to invest a portion of your portfolio on your own, always keep track of your performance. You need to be honest about your results and whether they beat the rest of your portfolio, or even a simple target-date fund.

Investing modest amounts is an advantage. Use it. Warren Buffett had a lot more flexibility with a smaller asset base. There are many deals out there that on a percentage basis are attractive, but if you have to deploy billions, it won’t even move the needle. For example, there might a 12-month CD that earns you 8% APY, but only on $10,000. If you only have $20,000 to invest, putting a big chunk of your portfolio in a risk-free 8% would be much smarter than stocks over the next year. However, if you have $100 million to invest, such a deal would be a rounding error. Some other transactions like odd-lot tenders are also ideal for smaller investors.

Worry about risk and return, not about the name of the product. It doesn’t matter if it’s a laundromat, rental unit, shares of a public company, or bonds. When Buffett was winding down his partnership, municipal bonds were yielding 6.5% on a tax-free basis. In his mind, it was a better investment to buy the municipal bonds rather than stocks given the near-term prospects. So that’s what he recommended.

Ignore the crowd. Think rationally and independently. If you’re going to “beat the market”, then you have to think differently than the market. You’re looking for some area where the market price is much lower than the intrinsic value. By definition, that means a lot of people will be disagreeing with your opinion.

Develop your best ideas, and then bet big on it. Buffett is not a big fan of owning 100+ stocks in the name of diversification. If you have your 5-10 best ideas, why also invest in the other 90 that are worse? If you’re going to actively manage your portfolio, you must have the conviction to bet big on your opinions.

Self-confidence is required, as you will have periods of bad performance. For me, keeping my conviction during times of underperformance is the primary reason most of my portfolio is indexed. Here a stat from the book credited to Joel Greenblatt: Of the top 25% of managers who had outperformed the market over the decade: 97% spent at least 3 years in the bottom half of performance and 47% spent at least 3 years in the bottom 10%.

If you are hiring an outside manager, look at integrity first. Buffett on the types of managers he seeks for Berkshire:

We look for three things: intelligence, energy, and integrity. If they don’t have the latter, then you should hope they don’t have the first two either. If someone doesn’t have integrity, then you want them to be dumb and lazy.

As a side example, here is how Buffett organized his own fee structure for the partnership. If the fund did not accumulate anything past a 6% annual gain every year, he would not take any fees at all. Above the 6% annual rate, he would take 25% of gains as his fee. While some hedge funds also employ a “high water mark” system, they usually still have some form of flat fee that they take, no matter way. If Buffett didn’t reach his 6%, he got nothing. In addition, he had nearly all his own net worth in the partnership as well. He “ate his own cooking”.

Warren Buffett’s Ground Rules: Shared Concepts with Low-Cost Index Funds

groundrules0If you get in a debate about owning index funds, Warren Buffett will likely be invoked as an example of successful stock-picking. A recent book called Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor covers a period when Buffett was arguably at his peak of active stock trading. However, even during this time, Buffett’s rules and wisdom still shared a lot in common with low-cost index investing.

From 1956 to 1970, Buffett managed a relatively modest amount of money through the Buffett Partnership Limited (BPL), mostly from family and close friends. Already a good teacher, he wrote his partners a series of transparent, frank, and educational letters. While he does write a lot about his outperformance goals and successful trades, but here are examples of how you can be both a Buffett fan and an index fund fan.

You are buying fractional ownership of a real business. Too often, stock trading is treating like playing a game with numbers that zip up and down. Even if you just buy index funds, you should always realize that you are still buying a piece of a business and all its future earnings. These businesses employ hard-working people and provide tangible value and useful services to customers.

In the long-term, the market is efficient. Value investing tries to take advantage of times when the quoted prices of shares vary from “intrinsic value”. Market quotes will vary in the short-term, and you can’t predict them. You can only choose whether to buy, sell, or do nothing. However, value investing also relies on the price eventually returning towards intrinsic value in the long run.

If you buy index funds, you do not spend your time and energy determining intrinsic value. However, you also believe that the markets will work themselves out over the long run.

In the short-term, be ready for big drops in prices. Even though index funds give up the search for intrinsic value, all stockholders are subject to the same short-term swings. From a 1965 BPL letter:

If a 20% or 30% drop in the market value of your equity holdings is going to produce emotional or financial distress, you should simply avoid common stock type investments. In the words of the poet Harry Truman – “If you can’t stand the heat, stay out of the kitchen.” It is preferable, of course, to consider the problem before you enter the “kitchen”.

Beating a diversified index of companies is hard. From a 1962 BPL letter. Buffett made these observations more than a decade before a single person owned an index fund… because they didn’t exist yet.

The Dow as an investment competitor is no pushover and the great bulk of investment funds in the country are going to have difficulty in bettering, or perhaps even matching, its performance.

You may feel I have established an unduly short yardstick in that it perhaps appears quite simple to do better than an unmanaged index of 30 leading common stocks. Actually, this index has generally proven to be a reasonably tough competitor.

Consider after-tax results. Buffett offers good advice in that you should always keep track of your portfolio on an after-tax basis. If you are creating a lot of short-term capital gains, your outperformance has to be rather significant in order to counteract the additional tax drag. This doesn’t mean that Buffett never traded – he did a lot of transaction in the partnership years – but he also had many years of awesome returns.

Today, some people criticize Berkshire for not distributing a dividend, but in fact Berkshire does a great job deferring taxes so that the growth can keep compounding and keep your after-tax returns higher. If cash is needed, a Berkshire shareholder can always sell some shares.

A market-cap-weighted index fund usually has very low turnover and thus minimized tax drag. An actively-trading mutual fund that has the same pre-tax performance numbers as a passive mutual fund will often have lower after-tax performance.

More assets makes it much more difficult to create outperformance. More assets doesn’t always translate into lower returns, but as Buffett states you must have enough ideas to put that money to good use. From a 1964 letter:

Our idea inventory has always seemed 10% ahead of our bank account. If that should change, you can count on hearing from me.

Buffett stopped accepting new partners when asset levels reached $43 million. He decided to unwind the partnership completely in 1969, for a variety of reasons. He eventually found a better way to align his interests by all becoming shareholders of Berkshire Hathaway (and only taking a small salary as CEO).

A mutual fund with high performance will naturally attract a lot of assets. The good ones will stop accepting funds if the asset levels outrun their supply of great ideas. The bad ones will keep accepting funds because it means higher management fees. However, with Vanguard index funds the problem goes the other way. As the asset levels rise, the costs go down and the performance is unaffected. Here’s an interesting profile of the little-known manager of the Vanguard Total Market Index Fund, which now holds nearly a trillion dollars in assets.

Smarter Better Faster by Charles Duhigg: Book Review and Highlights

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We’d all like to improve our productivity. Ideally, this would only involve downloading an app for 99 cents. 🙂 Instead, Charles Duhigg did a lot of research in various areas and filtered out universal concepts that we can apply to our everyday lives. The books is called Smarter Faster Better: The Secrets of Being Productive in Life and Business. I won’t create Cliff Notes for the entire book, but instead here are the big ideas that I want to apply to my own life.

Motivation. People work harder and push themselves more when they believe they are in control. People also work harder when they can apply meaning to their work. Their actions should be an affirmation of their greater values and goals. This, you can motivate yourself by injecting even a little control or your values into the situation. For example, you may be ambivalent about heading a committee this year, but you can state you’ll do it if you can train someone else for the job next year. Or you may not enjoy cleaning up the yard, but you can focus on providing your kids a safe, outdoor place to play.

Goal setting. To get things done, you must move from vague aspirations like “do your best” to concrete plans. You’ve probably heard of SMART goals (Specific, Measurable, Achievable, Realistic, Timeline). However, it is important to start with a big “stretch” goal first, and then break things down into appropriate SMART sub-goals. Otherwise, you are in danger of picking a bunch of little, easy goals in order to check them off your To-Do list.

Here’s a video that Duhigg created called How to Build a Better To-Do List:

Teams and Managing Others. Teams work best when everyone feels that they have the authority to speak their mind. To accomplish this, people need to be sensitive to others so that they feel safe in expressing their opinions. This can be hard to do, but it is critical. I’ve definitely seen the opposite of this many times in group settings. Specific anecdotes show how this applies both to Google tech workers and Toyota’s auto factory workers.

Overall, I felt the book to be well-written and easy to read. The books has a lot of interesting stories to help illustrate the concepts. I like that sort of thing; you may not. I borrowed this one from the library, and I think it was definitely worth the time spent. Don’t skip the Appendix, either.

Book Review: Money for Something – A Free Investing Primer

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There is always a demand for starter books on investing and personal finance, especially as graduation season is coming up again. Although they often cover similar topics, the execution varies widely. For example, I found Tony Robbin’s “7 Simple Steps to Financial Freedom” to be dense, unfocused, and it somehow ended up suggesting a complicated insurance product. Blech.

This is why I found it refreshing to read Money for Something – A Handy Field Guide for Turning Small Investments into Financial Freedom by Matt Henderson. This starter book was short, focused, and practical:

  • Short – The book consists of 17 brief chapters. In roughly the time it takes to read 17 of my blog posts, you can finish this book.
  • Focused – The world of investing is wide and deep, which makes it very tempting to explore every nuance. This book keeps the supporting material very tight.
  • Practical – The same holds true for the actual implementation of his plan. For examples, he gives you two options for model portfolios, he tells you where you can buy them, and that’s just enough to get you started.

Henderson has an engineering background and says the book is based on his own experiences. Here’s an excerpt from the introduction:

Hoping not to rely on luck, I began reading books about personal investment. What I discovered was very exciting—that practically anyone can achieve financial freedom.

I put the principles I learned into practice, and over the next 15 years confirmed that they work. It seems profoundly important that the path to financial freedom is so accessible—just by following a set of basic principles with discipline. At the same time, it seems profoundly sad that so many never find it, simply because they are unaware.

In terms of criticisms, it would be the same as with any starter investment book. Readers should take it as a rough roadmap, something motivational that shows a way to get from here (starting out) to there (financial freedom). But actually following the map will take many years, and there will be many distractions and moments that question your faith along the way. In my experience, you will need to keep learning in order to build up the required confidence in your (probably somewhat different) plan. It’s not that the original plan wasn’t good, more that you need something that you truly believe in. Don’t let that scare you off though, because the payoff is worth it!

This may also help… Money for Something is now available for free to read online, $5 in PDF format, and also available for purchase in Kindle format.

Recap. Concise and practical starter investing book. If you need a short roadmap, I recommend reading this book and doing additional research as needed. It’s free to read online, so that’s one less excuse!

Related: Another recommended starter book on personal finance is If You Can by William Bernstein, which is also free in PDF format and about $6 in paperpack. You can use the included recommended reading list for additional research.