#17: How to choose better investments
11th January, 2020
Welcome to the Idiot Money newsletter. The newsletter that chooses life with a touch more consciousness than a cult 90s movie poster.
This week: becoming wiser with money by understanding that it’s better to wire your brain for wiser choices than pay a reassuring conman to make idiotic ones for you.
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Don’t worry about choosing the right investments. Choose the right way to look at investments and the right ones may just choose themselves.
The blue and purple lines represent investments. They start and end at the same place. Which would you rather have owned?
It’s a question I’ve asked dozens of clients over the years.
‘Lucky you!’ I say, after everyone picks purple, ‘for they’re exactly the same investment!* The blue line is what you see if you check your investment returns every year; the purple line is what you see if you look every 10 years… so good news! You get to choose which one you own.’
(The good news gets better when you consider the effort expended in the looking… which, if you value your time at all, makes the one-year returns almost as bad as those on rental properties when you capitalise the hassle of owning them.)
The point: your experience of being an investor in each scenario has nothing to do with the investments, and everything to do with how you choose to look at them.
This goes far beyond investments, or even how we live with money in general. As one new-agey writer put it: ‘Everything is a choice. This is life’s greatest truth and its hardest lesson.’
Part of the problem lies in what J.K. Galbraith was talking about when he quipped: ‘In the choice between changing one’s mind and proving there’s no need to do so, most people get busy on the proof.’
The huge advantage (or disadvantage, depending on how you choose to look at it!) with money is that you can’t escape those choices. No one goes for more than a few hours without making some sort of money decision, even if most of the time it’s done so unconsciously.
As William James put it: ‘Selection implies rejection as well as choice [...] the function of ignoring, of inattention, is as vital a factor in mental progress as the function of attention itself.’
When it comes to money, the costs of inattention – of blindness – can take many forms. For example:
1. Getting stuck on the short-term emotionally salient. As Charlie Munger said: ‘People make bad choices all the time, usually because of a fundamental inability to operate over longer time frames.’
2. Believing you’re making conscious choices when you’re not. As Steven Kaas said: ‘You are not the king of your brain; you are the creepy guy standing next to the king going, “A most judicious choice, sire.” ’ In many ways, this is the point of the book: to open eyes to things being choices that people don’t believe are choices.
3. Confusing symptoms and states. Investing isn’t objectively scary or complicated. I don’t find it scary or complicated. Its scary-and-complicated-ness is taken by many to be a state, when really it’s a symptom of something deeper. This is why telling someone it’s not scary and complicated works about as well as telling someone who erroneously believes a sweet tooth is in some way biological rather than neurological (i.e. a story, not a quirky socially-acceptable death-sentence) to just stop eating sugar.
Sometimes symptoms can – and should – be tackled with psychological nudges. But because money is so intertwined with our worldviews, we need something that seeks to shape our neurology, not play tricks on it: we need philosophy.
Being told to look at the purple line works only if it’s grounded in a philosophy that’s open to understanding what’s relevant and what’s not.
By ‘works’ I mean increases your comfort and confidence with investing, and generally using your money to improve your life. And further that this comfort and confidence comes from competence and understanding… that isn’t simply a deceptive feeling you hide behind because you were trying to either impress or get rid of the guy in the suit you’re paying for reassuring lies about your dreams of ‘financial freedom’.
As another new-agey writer put it, your freedom doesn’t come from your numbers, but the choices they express: ‘[people] must learn that the entirety of one's adult life is a series of personal choices, decisions. It they can accept this totally, then they become free people. To the extent that they do not accept this they will forever feel themselves victims.’
If freedom means anything beyond something to shout when covered in facepaint and marching to defend your right to do anything but think freely, it means the freedom to write your own stories.
The implications of understanding this go way beyond the difference between two arbitrary investment experiences of course. It brings in your entire relationship with money.
Because – like with any behaviour change that you actually want to work – all roads lead back to your brain. And if you act as if they don’t, you’ll be forever spinning around in self-deceptive circles.
1. How you do anything is how you do everything. Every decision is a vote for a worldview that either makes life better or worse. (See also Maxim of the Week below).
2. It gets easier. Every choice makes one neural pathway easier to go down, and another one more difficult. You don’t need to choose the good path for long before it starts to choose itself. But you do need to do it for a bit.
As David Foster Wallace put it: ‘If you’re aware enough to give yourself a choice, you can choose to look differently. […] It means being conscious and aware enough to choose what you pay attention to and to choose how you construct meaning from experience.’ There are echoes here of Aristotle, and his conception of freedom as directing one’s attention to the same stuff reason rightly recognises as worthy of attention.
Advice that doesn’t start with neuroplasticity isn’t advice, it’s enablement.
But neuroplastic changes are the least emotionally salient thing in the world, and short-term fluctuations in money are the most. So while, as David Eagleman wrote: ‘Invisibly small changes inside the brain can cause massive changes to behavior [sic]’ because ‘our choices are inseparably married to the tiniest details of our machinery’, we choose to ignore them.
Remember, as any good existentialist would tell you: you don’t get to choose not to choose. Existence precedes essence. Who you are (your essence) is the result of your choices (your existence).
You are what you make yourself to be. And your success with money is what you make it too.
There is an alternative, of course. Thinking is hard. There are plenty of cowboys out there only too happy to let you pay them more than you pay for everything else put together each year to do your investment thinking for you. It’s your choice.
* Stickler footnote: real clients got graphs built from real data depending on their actual portfolio; this works with anything equity-based. I’d then often follow-up with other exciting graphs showing that if you look at investments every day, you’re as likely to see a loss as a gain, but that if you look over a decade, you’d only ever see a doubling in value. Depending on the blah blah blah… This, incidentally, was about as much numbers-based chat as any clients ever got from me. Financial-planning meeting minutes are valuable: they shouldn’t be wasted on numbers.
Train to hear these words and phrases as you do you own name across a crowded room, then stop and check that the belief underlying your automatic reaction is true.
Skipping a single commitment happens. Sometimes even for good reasons. But it has consequences in your brain that last a lot longer than the next couple of minutes. It doesn’t make it MORE likely you’ll do the right thing next time, it makes it LESS… however hard you promise yourself otherwise.
There’s no such thing as ‘just this once’. Every action makes one pathway in your brain easier to travel down next time, and another one harder. Think of your life as a system, not a series of snapshots: don’t waste your willpower on doing stuff Present You is already sufficiently motivated to do. Use it to give a helping, environment-controlling hand to the Future You who doesn’t have enough.
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Money Maxim of the week