"The Art of Winning an Unfair Game"

Today's Brief explores our natural affinity toward speed and power in our investing options. Why is it that we almost universally tend to swing for homeruns when singles and doubles will get the job done? 

In his book Moneyball: The Art of Winning an Unfair Game  Michael Lewis told the story of Oakland Athletics’ baseball manager Billy Bean’s success in taking one of the poorest teams in major league baseball to the top against teams with two and three times their salary budget. Billy came to believe that on-base percentage and slugging percentage were better indicators of offensive success than industry-standard qualities such as speed and contact with the ball. In other words, simply getting on base more often, no matter how you do it, is more important than stealing bases, batting runs in, or batting average.

But the concept of ‘slugging' it out being superior to ‘speed’ is certainly not new with Billy Bean or Major League Baseball. Back in 560 BC or so a fellow named Aesop depicted the theory in his fable The Tortoise and the Hare. You know the story; the arrogant hare, after ridiculing the slugging tortoise, takes his challenge to a race. After quickly leaving the tortoise in the dust, the over-confident hare tires and decides to take a nap only to find later that he has been passed by the steadily plodding tortoise.

But who would bet on a tortoise in a race against a hare, except maybe Aesop or the tortoise? It just doesn’t make any sense. We seem to be naturally drawn to the speed of the hare, the daring of base stealers, and the power of the big home-run hitters. In the same way, in our investing, we are attracted to the hottest mutual funds and stocks. They are so much more appealing than plodding, boring  index funds.

So let's have a little race ourselves. If you could go back to 2000 and pick just one stock, knowing what you know right now (without further study), which one would it be? I’m guessing Apple would be top-of-mind for many. Since the beginning of 2000 Apple has generated a cumulative return of 2,232% or 29.3% annually. A sum of $100,000 invested in Apple on the last day of 1999 would be worth $2.3 million today.

Now let’s make this race really interesting. What if you were 65, ready to retire, and that you could choose to retire here and now, with no knowledge of the future, or you could go back to January of 2000, with perfect knowledge of how two investment choices would perform? You have $1 million and want to spend  at least $80,000 of it annually. Your choice consists of keeping your dull index portfolio consisting of 60% stocks and 40% bonds and cash or Apple. As with Apple’s return of 29.3% you learn that your portfolio will return 4.9% annually for the next 12 years. Which one will you choose?

If you succumbed to temptation and picked the Apple, I’ve got some bad news for you: in mid-July of 2007 you would receive a phone call from your advisor informing you that your account was fully depleted. You just got kicked out of paradise.

Alternatively, if you opted for the ‘tortoise' portfolio, of 60% stock and 40% bonds, you would have plodded comfortably along, through 2007, 2008, 2009, 2010, 2011, and 2012. As of March 31^st of this year, you would still have $197,308.

Data Source: Morningstar

As you look at the data above, the first thing that might surprise you is just how badly Apple got hit in 2000. Just a moment ago, when you were making your selection, you likely remembered 2000 was a tough time for tech stocks, but that stellar12-year return you heard about, likely helped persuade you to set 2000 aside as an ugly and horrible outlier. But as you look at the numbers more closely, see what a cost to lifestyle that ‘ugly outlier’ inflicted. Your portfolio fell from $1,000,000 in 2000 to $266,430 in just a year.

Back to our metaphor; what a costly nap that was for our hare! But maybe all would not be lost though. The following year’s 64% sprint might just get him back in the race, but alas, another rest stop for 31.2% would be required. From there, the race was over. Our hare ugh, Apple would never catch up, even with blistering hops of 45%, 183%, 157%, and 25% in the years that followed.

The birds-eye view shows that the race was never really close.

If you are the New York Yankees with $125 million to throw away every year, then you can afford some flashy rabbits. But if you more closely identify with the Oakland A’s on one third that budget, perhaps some steady slugging is the wiser course.

The wisdom of Aesop’s Tortoise and Hare  has been around for some 2,500 years to guide the investment practices of those who heeded. But wise investment counsel actually dates considerably further back. Speaking for God back in 920 BC, King Soloman wrote “The plans of the diligent lead to profit as surely as haste leads to poverty.” Proverbs 21:5.

Have a great weekend.

Good Friday

Jesus Christ was crucified, died, and was buried on the Friday which preceded the original Easter. Why is a day that marks Jesus’ horrible suffering and death on a cross called "good?"

Actually, the term 'good' is unique to the English language. According to Ken Collins, in Germany this day is called Karfreitag. “The Kar part is an obsolete word, the ancestor of the English word ‘care’ in the sense of cares and woes, and it meant mourning. So in German, it is Mourning Friday. And that is what the disciples did on that day—they mourned. They thought all was lost.”

The origin of the name Good Friday, according to some scholars, comes from an Old English synonym (good) for "holy." Others argue it is a corruption of the word "God," in the same way that "Good Bye" comes from the phrase "God be with ye."

Christians call this day “good” because Easter represents the culmination and the victory of Jesus’ “Good News,” or Gospel. Christ’s death is the fulfillment of God’s judgment on sin. Oswald Chambers puts it beautifully: “There is nothing in time or eternity more absolutely certain and irrefutable than what Jesus Christ accomplished on the Cross— He made it possible for the entire human race to be brought back into a right-standing relationship with God.” That is GOOD NEWS for us all!

Have you also wondered about the three days and three nights? There aren’t three days and three nights between Friday and Easter Sunday, so how is this explained? The scriptural reasoning is that the saying is idiomatic. It occurs elsewhere in scripture. Ken Collins notes that Jonah spent three days and three nights in the belly of the whale. But he was swallowed by the fish one day and spit out on the third day (Jonah 1:17—2:10). In order for there to be three days there could only be two nights separating them. Similarly, in Esther 4:16—5:1, there is a fast for ‘three days and three nights’ that begins on the first day and ends on the third day, which means only two nights were involved.

Jesus was buried on Friday, the day of his death, and rose three days later from the dead, breaking forever the bondage of sin over mankind. Chambers says “The heart of salvation is the Cross of Christ. The reason salvation is so easy to obtain is that it cost God so much. The Cross was the place where God and sinful man merged with a tremendous collision and where the way to life was opened. But all the cost and pain of the collision was absorbed by the heart of God.”

Good News and Happy Easter

Your Future Called and it Could Use Your Attention

You have brains in your head and feet in your shoes
You can steer yourself any direction you choose.
You’re on your own and you know what you know
And you are the one who’ll decide where to go. 

Dr. Seuss

Anyone who can grasp the concept of a future understands the power of goal-setting and planning. We and no one else are responsible for our own lives, yet we spend so little if any of our time directing our lives, with or for any great purpose.

According to the Bureau of Labor Statistics how we spend our time might well surprise you. In a 24-hour day, sleep and personal care occupy the greatest chunk at 9.5 hours or 40%. We spend another 1.25 hours eating and drinking and 2 hours cleaning up from it; along with the laundry and the lawn, etc. And don’t forget our work. The average American spends 3.5 hours of his/her day at work (7.8 hours per day for those actually working). We spend 45 minutes shopping and 15 minutes in spiritual activities (for some they are the same). And here’s the topper – we spend a whopping (drum roll) 5.2 hours per day entertaining ourselves that’s more than a third of our waking day spent enjoying ourselves in the moment.

Mark Twain encourages us to "plan for the future because that is where [we are] going to spend the rest of [our] life.” But that is not what we do. In fact, very few of us set goals and plan (beyond business or job requirements) and fewer still write them down and review them regularly. Many web posts claim only 3% in the latter category, but I have not found sufficient study evidence to provide a number. Let’s just say it’s a very small percent of the population.

So, if almost anyone would agree that planning is beneficial, why do so few of us do it?
  

We are too busy

The Labor survey demonstrates that we are just too busy living in the moment to look down the road any great distance. For many of us the future is not much more than our next text response or what’s for lunch. If things are good now, why take time to think about possibly working harder on some goal to make them even better? After all, John Lennon implored us to live in the moment; “Life is what happens when you’re busy making other plans.”

 

Another way to put it is that too many of us are simply not serious about our future. We don’t live as though we had any greater purpose or significance than simply moving to the next thing. Yet with each passing day, we know in our hearts that unless we get serious, we will not accomplish anything of consequence. Who starts to build and does not count the cost? Clearly what is lost for most of us is a healthy balance between living well today and planning for a better tomorrow.

We Don’t Believe

 

Our own doubts can be powerful disincentives to goal-setting. We’ve carried many of them from our upbringing, childhood to present, we own them. They are so familiar to us they have become a part of us. And if you can’t squash your dreams yourself, tell them to someone who doesn’t value planning or goal-setting and they’ll help you kill them.

Remember Orville and Wilber the bicycle shop owners? They had a dream to change the world by figuring out this flying thing. How many times do you think they heard how ridiculous their dream was from family, friends, customers, and strangers alike? Through it all they were able to shake off their self-doubts and those of virtually everyone around them to accomplish something far greater than their immediate reach, financially, physically, or emotionally. Visit the Smithsonian sometime to see and read their plans. What a fabulous story of planning at its finest. As Dale Carnegie put it, “most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no hope at all.”

We Fear Failure

Perhaps the greatest obstacle to success in life is the fear of failure. It can paralyze and lock us into routines that are well below our potential. We focus only on the obstacles, the potential failure. Hannah Moore said that “obstacles are those frightful things when you take your eyes off your goals.”

People who fear failure don’t understand that it is a vital and necessary part of success, in fact a prerequisite. Anyone striving to reach his potential must be willing to risk repeated and often costly failures along the way.

Consider the Wright brothers once again. Not long ago I was able to see an extraordinary exhibit of their accomplishments in a large exhibit devoted to them at the Smithsonian. I was absolutely fascinated by their detailed notes and plans. They read like a story of heroic design against an unknown, uncharted abyss we call the atmosphere. It was standard operating procedure for them to take multiple sets of replacement parts to repair their machine crash after crash. But progress was made with each grinding and dusty crackup. Their notes read like ‘failure, failure, re-design, failure, tweak, slight improvement – failure and so on.’ Then on December 17, 1903 all their plans, failures, blood, sweat, and tears culminated in man’s very first controlled, powered and sustained, heavier-than-air human flight.

As far as your financial planning goes with us, our Monte Carlo model ‘lives’ the failures so you don’t have to experience them. We can confidently avoid them leaving nothing to fear, on the financial front anyway.

We Don’t Understand the Importance

Many people, in fact most, grow up with no introduction to the importance of goal-setting or planning. And unless they were introduced along the way, they remain unaware of the true potential. For these folks, stories about the heroes of goal-setting and achievement could well be about people from another planet. They would have no frame of reference even of the concept of planning for a better future.

How Can We Improve? And How Can Beacon Help?

Heidi Grant Halvorson, a Ph.D., motivational psychologist and author of the Harvard Business Review Single Nine Things Successful People Do Differently, addresses the reasons we are successful in reaching some of our goals and not others. She says that even brilliant and highly accomplished people are not good at understanding shy they succeed or fail at goal-setting. Its really quite more than native talent.

Here are Halvorson’s nine things successful people do differently (in quotes) with my thoughts added (in itallics) where we can help.

1. “Get specific. When you set a goal, try to be as specific as possible. Knowing exactly what you want to achieve keeps you motivated until you get there. Also, think about the specific actions that need to be taken to reach your goal.” Every financial goal you value is front-and-center in and fully integrated into our planning and management process.

2. “Seize the moment to act on your goals. Given busy schedules and multiple goals we routinely miss opportunities to act on a goal because we simply fail to notice them. Decide when and where you will take each action you want to take, in advance. Studies show that this kind of planning will help your brain to detect and seize the opportunity when it arises, increasing your chances of success by roughly 300%.” This is the strength of our process. We alert you the opportunities present themselves to improve a goal or goals and to make necessary adjustments if confidence slips.

3. “Know exactly how far you have left to go. Check your progress frequently — weekly, or even daily, depending on the goal.” Through Wealthcare we monitor your progress continually. You make adjustments when we talk or meet. Your plan is only as good as you make it.

4. “Be a realistic optimist. When you are setting a goal, by all means engage in lots of positive thinking about how likely you are to achieve it. Believing in your ability to succeed is enormously helpful for creating and sustaining your motivation. But whatever you do, don't underestimate how difficult it will be to reach your goal. Most goals worth achieving require time, planning, effort, and persistence.” Measuring difficulty or uncertainty is the key benefit of our continuing Monte Carlo stress testing. We rigorously ‘live’ your life plan through all kinds of realities including the wildly good and the horrendously horrible.

5. “Focus on getting better, rather than being good. Believing you have the ability to reach your goals is important, but so is believing you can get the ability. Many of us believe that our intelligence, our personality, and our physical aptitudes are fixed — that no matter what we do, we won't improve. As a result, we focus on goals that are all about proving ourselves, rather than developing and acquiring new skills.” Every time we meet your plan improves.

6. “Have grit. Grit is a willingness to commit to long-term goals, and to persist in the face of difficulty. Studies show that gritty people obtain more education in their lifetime, and earn higher college GPAs. Grit predicts which cadets will stick out their first grueling year at West Point.” You have grit and we do too. Together, we’ll make your plan and your life even better.

7. “Build your willpower muscle. Your self-control "muscle" is just like the other muscles in your body — when it doesn't get much exercise, it becomes weaker over time. But when you give it regular workouts by putting it to good use, it will grow stronger and stronger, and better able to help you successfully reach your goals.”

8. Don't tempt fate. No matter how strong your willpower muscle becomes, it's important to always respect the fact that it is limited, and if you overtax it you will temporarily run out of steam. Successful people know not to make reaching a goal harder than it already is. We have decades of experience working with clients through all kinds of markets. If your willpower muscle becomes overtaxed, lean on us.

9. Focus on what you will do, not what you won't do. If you want to change your ways, ask yourself, What will I do instead? We will help you confidently improve your life.

That's it for now. Hope you have a great weekend and consider "Following your dreams, they know the way."