#36: My favourite way to think about investing, part 5: cost-benefit investing

24th May, 2021

Welcome to the Idiot Money newsletter. The newsletter that values its time.

This week: becoming wiser with money by understanding that the costs of investing don’t stop at the last page of your statement.

This is the fifth and final part of our series on my favourite framework for investment decision-making: all investments are gambles. See also parts 1, 2, 3, and 4. This week: a quick round-up, and crushing the calculations of a client with a property-owning obsession.

Every investment is a gamble. It should be judged according to a cost-benefit analysis, not by its outcome. If you’re investing in service of your life, the time and energy costs are just as important as the monetary ones, and often vastly larger.

Which investment would you prefer? Assume the investment risk of each choice is the same.

A – Returns 10% per annum for five years net of tax and monetary costs (so every £1,000 becomes £1,611). Takes 10 hours a week to manage, and you think about it a lot outside of that, which stresses the heck out of you.

B – Returns 7% per annum for five years, net of tax and monetary costs (so every £1,000 becomes £1,403). Takes one hour a year to manage, with no additional thinking or stress.

If you chose B, how much would the difference in return have to grow to make A worthwhile?


Carol was in many ways a typical client of a mid-sized financial-planning firm. Via earnings, inheritance, and divorce, she had responsibility for a million or so in a standard portfolio of shares and bonds. However, she wasn’t interested in these.

In helping her move the portfolio away from a bunch of cowboys, it felt like the stories that had stuck with Carol in doing so weren’t the positive ones about what she was now invested in, but the ones about the shysters she’d escaped from. She just about trusted her investments were ‘sorted’, but it would’ve been a brave move from her adviser to ask her to explain how. And, one felt, it wouldn’t take much for someone else to persuade her that all stock-market investments were a con.

Carol did, however, like to talk about her five rental properties. She was seriously considering cashing in the share portfolio to buy a couple more.

While she claimed to be completely flummoxed by all things ‘financial’, she flat-out bragged about the spreadsheet that managed her properties and calculated their returns.

It was not explaining the usual relative disadvantages of property (liquidity, fees, tax, etc.) that stopped Carol in her tracks. Nor was it highlighting the disconnect between seeing borrowing money to invest as unthinkably risky, but making multiple leveraged bets on the housing market in one part of one city as totally fine.

Adviser: Those returns are certainly excellent. Congratulations. Do you know many hours a week you spent dealing with the management company, the tenants, playing with the spreadsheet, etc.?

Carol: Oh, not exactly. A few I suppose. Sometimes none. Sometimes it takes over a weekend. On average, maybe three or four hours per property per week, so 15-20 in total?

Adviser (judiciously not asking about extra time spent stressing about it): Do you enjoy it?

Carol: Gosh no. But it’s a small price to pay. I mean, it’s worth it for the returns.

Adviser: Out of interest, when calculating those returns, do you capitalise the value of those 15-20 unenjoyable hours and deduct it?


For all the increasing focus on financial fees, time and energy are the costs everyone still overlooks. And of course it’s not only property.

When we forget, or rather pretend, that the role of money can be accounted for on a spreadsheet, we drift dangerously close to seeing ourselves as robots keeping our humanity warm until the circumstances are right for it to hatch. Sadly, even those that one day figure out that life isn’t lived in the future after all, often delay so long that when the circumstances are finally deemed right, the humanity has decayed.

We’ll return the perils of this ‘arrival fallacy’ another day. For now, the concluding points of this series on how to choose investments are:

  1. You and your money are part of the same pool of resources, all aimed at the same thing: living a Good Life. Divorce the two, and you divorce your relationship with reality. This rarely ends well. Gambles without a cost-benefit calculation are idiotic. And the better life already is, the better your investment return must be to justify its non-monetary costs. Glittering promises should trigger not Pavlov-dog-like salivation, but a simple question: Does it work?

  2. When comparing investment returns, you should capitalise your time and energy costs and factor them in. You are investing to make money. You wouldn’t take a job to make more money if the benefits didn’t justify the costs. Until you’re investing millions (or if you really happen to enjoy the whole investing process) then the main costs are your time and energy.

  3. Stay alert for the subtle manifestations of your craving for simplicity… they’re sneakier than you believe. Cost-benefit calculations are trickier than reactively leaping from ‘sounds good’ to ‘take my money’. This is no reason not to do them. Consciousness in everyday decision-making (and nothing says everyday decision-making like money) is a bit like nose-breathing during exercise: tough to start, but the more you do it, the easier it gets, until eventually you do the exercise with greater all-round ease, and no drop-off in performance. In finance especially, to jump to a conclusion is often to plunge into a con.

  4. In short, have an investment philosophy. This is something you think yourself into, not get sold on by someone else. The aim is to think yourself into a position that requires not-thinking, or effortless effort (rather than blind unthinking). All investments are gambles, so understand what you’re betting on. A philosophy is key to this. Get comfortable with placing simple sensible long-term bets on things you understand, and where the odds are in your favour… then forget about it. Doing this is not only a way to make money with next to no ongoing costs, but it’s also an effective antidote to FOMO.

Much as I’m sure some will read it as such, this post isn’t about whether property or the stock market makes for a better investment. It’s about grounding whatever decision you make on an investment philosophy.

Philosophy isn’t a strategy, it’s a way of seeing. Besides, confidence doesn’t come from a calculator. Not least in this respect because it’s been demonstrated by statty folk ‘that you would need 25 years of experience with a strategy to determine with 95% accuracy whether or not it had a statistically significant chance of outperformance.’

There’s a reason investment ‘alpha’ gets a one-word definition in Jason Zweig’s Devil’s Financial Dictionary: ‘luck’. True confidence comes from understanding what you’re betting on – your chances of winning and losing, and being happy with risking the latter to gain the former.

The book as a whole is about the importance of philosophy in your general relationship with money. An investment philosophy is a microcosm of this.

But simply telling someone to ‘have an investment philosophy’ when they see investing as scary and complicated (and when they don’t see the screwy ways their relationship with money is written in their minds) is unlikely to go very well.

Which is why you need to find a framework. One that guides you towards more conscious decisions, not tempts you away from them.

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