Money

Because I live in the mountains where the weather changes often, I’ve never really relied on forecasts. Instead, I prefer to look out of the window to see what’s happening in real-time. My low-tech approach made sense for years. But my strategy—and the jokes about weather forecasters—may one day be a thing of the past. 

Even as you yell at your TV during the weather segment of your local newscast, forecasts are actually getting more accurate. Three-day forecasts today are as good as 36-hour forecasts were in the 1980s, and the average error in hurricane-tracking predictions has been slashed by two-thirds since the early 1970s. 

This improvement is a result of computer models that collect all the data—temperatures, clouds, and winds—and put it into mathematical equations. These models were built by looking for and identifying variables that offered some predictive value. Over time, as more of these factors were identified and fed into the model, the accuracy of the forecast improved. 

We have been attempting to do the same thing with the stock market. We have spent endless amounts of time, money, and human capital trying to identify variables that help predict market behavior. We have looked at the ridiculous (Super Bowl winners) and the more serious (past performance). Still, none of them have much predictive value, particularly over the short term. 

But that doesn’t stop us from looking, which often leads to guessing. And guessing is no way to make investment decisions. 

The pioneering investor Ben Graham is said to have described the market as being hard to predict: “In the short run, the stock market behaves like a voting machine, but in the long term, it acts like a weighing machine.” 

And because humans are doing the voting, it’s very difficult to predict which way the vote will go. Another reason is that investing is not a physical science. 

It’s not like gravity or even the weather. It doesn’t follow set laws. On any given day, the stock market represents the collective feelings of all of us. More often than not, those feelings are based on fear or greed. And it is only in hindsight that we recognize our mistakes. 

So while on one level, human behavior seems predictable (e.g., we get excited and buy stocks when they are flying high; we get scared and sell when stocks decline), it’s awfully hard to know what we’re doing until it’s too late. 

I bring up the subject of forecasting because, despite knowing better, I still see a lot of people playing what I consider a fool’s game. There is no proven, market-predicting model hidden in a computer that only a few people have access to. 

The facts have remained the same. Over time (think 10, 15, or 20 years), stocks typically do better than bonds, and bonds typically do better than cash. Low expenses are typically a good sign of future relative performance. We also know that a diversified portfolio will help protect you from the variability of the stock market. 

Beyond that, it’s just a guessing game, and we’re pretending to know something we don’t. 

I’m ready to stop pretending. Are you?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Once upon a time, I sent out an email asking people on my mailing list a simple question: 

Is it hard for you to talk about money with your spouse or partner? 

I got hundreds of replies, including this one, which I found particularly difficult to read: 

The answer is YES! It is hard, because it often feels defensive. She spent too much. He spent too much. Was that aligned with our values? What are our values? How come there isn’t more? And if only she would spend less, then I wouldn’t have to work so hard. 🙂 

And now, drum roll please… the part of that message that made it so hard to read: 

From, The Spouse. 

In other words, MY spouse! 

I have to admit that upon reading that, I was discouraged. There was even a part of me that felt like a fraud. Who am I to be talking to other people about money if my own wife feels this way? 

But I also need to admit that she’s right. It’s challenging for us to talk about money. Not just with each other, but with our parents, our children, even our siblings, and friends. 

And you know what? That’s OK. 

This, my friends, is one of the keys to talking about money: knowing that it’s going to be hard. Sometimes, it’s going to be painful. And that’s OK. 

At that time, my wife and I had been married for 23 years. She was my best friend then, in spite of the fact that we’d had more fights about money than I’d care to admit. 

And you know what? We’re still married, she’s still my best friend, and we still have fights (or at least arguments) about money! 

That’s the point. In spite of the difficulties we have talking about money, we’ve both agreed not to give up. 

Talking about money may not be necessary for all couples. If you’re one of those rare people, great! More power to you. But I doubt that is the case for the vast majority. 

My own experience is that talking about money is unavoidable. Like taking out the trash and doing the laundry, it’s just one of those things that has to happen. 

And if that rings true, then you really have just two options:

1- You can end your relationship with someone, and then you won’t have to talk about money with them ever again.
2- Or, you can keep trying. 

My advice? 

Keep trying. 

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

You know what’s worse than judging a book by its cover?

Judging a book by its cover… AND THEN making financial decisions based on what you guess that book might tell you.

And yet, we do this all the time. Not with books, but with people.

A smart economist named James Duesenberry called this The Relative Income Hypothesis. According to Mr. Duesenberry, people tend to spend more “because the higher spending of others kindles aspirations they find difficult to meet.”

Can we pause for a second and just think about that?

Not only are we judging that guy for the vehicle he’s driving (#NiceRangeRover, Bro)… we’re also likely to spend more on our own ride just to keep up with him.

My question is… WHY?

Why. Do. We. Do. That?

Seriously… why?

It probably won’t surprise you to hear that I’ve been thinking about that question for decades. I think the reason we do this—from the judging to the spending—is that we tell ourselves stories, and then we believe them.

Let’s consider the gentleman in the shiny Range Rover, for example. I don’t know about you, but I tend to tell myself the following stories about him.

1- Because he’s in that vehicle, he bought that vehicle (appearances = spending).
2- Because he bought that vehicle, he’s rich (spending = net worth).
3- Because he’s rich, he’s happy (net worth = happiness).

Let’s call that story what it is: a house of cards—layer upon layer of assumptions that have no basis in reality. Of course, I have no idea if that guy in the Range Rover bought it (maybe he’s the mechanic); even if he did buy it, we don’t know his net worth (ever heard the expression “Big Hat, No Cattle?); and even if he’s filthy stinking rich, we all know that doesn’t mean he’s happy (do I even need to say that?).

When we stop and think about it, of course, it sounds ridiculous. And yet, these stories we tell are incredibly insidious. They sneak and slink into our thoughts on a daily basis. They fill our brains every time we size up another person.

The truth, though, is that you just don’t know. You don’t know anything about that guy in the Range Rover.

Now, tell me. Do you really want your spending to be dictated by the story you’re telling yourself about him?

That, my friend, is the worst form of speculation…

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Let’s try a little thought experiment. 

Think back over the last couple of years to a time when you read something about money in the news, you acted on it, and then with the benefit of hindsight, you were glad you did. 

This could include any number of things: the latest IPO, bear markets, bull markets, mergers, market collapses. 

Whatever. 

Go ahead, I’ll wait. Close your eyes and think about it. 

… 

I’ve done this experiment hundreds of times around the world, and I’ve only had one person come up with a valid example. It was news about a change in the tax law. 

That’s it. 

Isn’t that interesting? 

Think of all the financial pornography out there, think of the number of dental offices that have CNBC playing in the background, think of the USA Today Money section. And almost all of it is noise. Almost none of it is actionable. 

Occasionally, we get information—you know, facts and figures. But most of that is useless because it doesn’t matter to you, or it is beyond your control anyway. 

The noise is worthless, the information is useless, and then every once in a while, there is a little teeny tiny speck that might be useful. In fact, the one piece of feedback I get about this sketch is that the little tiny dot that’s labeled “Stuff That Might Actually Be Useful” is way too big! 

This leads to one obvious question: Why are we paying attention in the first place? 

It might be fun—if you’re into that kind of fun. You know, like going to the circus. You might consider it part of your job to be up on the latest market news. 

But most likely, it’s just a waste of time. 

So now I’ll get out my little permission-granting wand and grant you permission to stop paying attention to all the noise. 

Instead, use that time to work on that list you have… 

You know, “The List.” The one that has all the really important things you actually want to do with your life. Hang out with your kids, learn how to surf, take an extra shift to pay off your credit card debt. 

Yeah, that list. 

Doesn’t that sound so much better than spending another hour watching CNBC?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

What’s important about money to you? 

This is an uncomfortable question because we aren’t used to thinking about money in those terms. But it’s one of my favorite questions to ask. 

The purpose of this question isn’t to think in terms of goals. It’s to go deeper than that, to get at the reason for why we have certain goals. 

The first answers people come up with are usually easy—things like security and freedom. But once we pause and really think, we can move deeper into what might be called the “why” of money. 

This question gets uncomfortable because it forces us to get really clear about our underlying reason for doing things. It also forces us to face some inconsistencies in our lives. 

Let me give you an example of how this works. 

My friend, who we’ll call Sara, was a hard-charging professional whose career required her to be super competitive. She was “type A” to the hilt and worked long hours. So when I talked to Sara and her husband and asked her this question, I was curious what she would say was most important. 

“Freedom,” Sara said, almost instantly. 

When I asked her what freedom meant, she replied, “More time.” 

So I said, “Okay, let’s pretend you’re there. Let’s say you have more time. What’s so important about being at that spot?” 

With some emotion, she said, “I just want the time to raise a child.” 

Bingo. 

Now, don’t get caught up on Sara’s specific answer. Her values are her own, yours may be completely different. The thing to keep in mind is that, like Sara, once you identify what’s most important to you, things get clearer. 

Being able to answer this question gives you a lens through which to view your financial decisions. And after you’ve identified what’s most important, you’ll have incredibly useful information to help you make decisions that match your values. 

In fact, it can even make it easy to say no to things that distract you from what’s important. Like Stephen Covey said, “It’s easy to say ‘no!’ when there’s a deeper ‘yes!’ burning inside.” 

For Sara, her answer became that “deeper yes.” The same can be true for you. You just have to ask the question.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Imagine it’s a very still day, and you’re in a boat on the ocean. 

There’s no wind. 

No swell. 

The water is as flat as a mirror. 

The calm goes on just long enough for you to start to feel like it’s normal. 

Then a small wave comes… it feels huge. 

And you’re shocked at how enormous a regular wave feels. 

As scary as it might feel… it’s important to remember that waves are normal. 

In fact, occasional storms are normal. 

And the last thing you want to do when you get into a storm is abandon ship.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Humans don’t fit into an algorithm. 

This is particularly true when we’re talking about humans and their money. 

Because “Humans + Money” is a messy little cocktail that economists refer to as a complex adaptive system. “Humans + Money” is complex because cause and effect can only honestly be identified with the benefit of hindsight, and it’s adaptive because our interaction with the system changes it. 

Try cramming that into an algorithm. 

As much as we would all love a simple formula to tell us what to do with our money—and believe me, there are simple answers, and maybe they’re a good starting place—the more we try to fit the big money questions into a neat little box, the more we find ourselves saying “it depends.” 

So what works better instead? 

The only way to navigate in a complex adaptive system is through constant course corrections. From my experience, the steps look like this: 

1- Assess.
2- Guess.
3- Act.
4- Repeat. 

Now, keep in mind that the cycle rate for these steps is going to be driven by the volatility of your situation. If the situation is relatively stable, you may only cycle through every six months or once per year. But when things blow up, you may be cycling through your financial decisions every day. 

The important thing is to remain flexible. Humans don’t fit into an algorithm, so don’t try. Rather than looking for a simple calculator, just acknowledge the reality that life, markets, and money are messy, and make yourself as adaptable as you can.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

We all know how important it is to talk about money.

But if talking about money is so important, why do we have such a hard time with it?

Maybe it’s because money is not in the math department, but the psychology department. 

We’ve been taught, if we were taught anything about money, that it’s about spreadsheets and calculators. It should be rational and reasonable. But then we go to open the AmEx bill with our spouse or partner, and suddenly we find ourselves in a fight.

It’s a little bit like grabbing an electric fence you didn’t know was electric.

We all know that no matter how worried, scared, or excited we’re feeling, 2+2 always equals 4. But when it comes to money, 2+2 equals feelings. Because, it turns out, money is not in the math department. It’s in the psychology department.

Since money is such an emotionally charged subject, it can be hard to talk about. I get that. But just because it’s hard doesn’t mean we get to avoid it.

There’s a pattern of behavior around money. Overspending, buying cheap plastic items thinking they will bring us happiness, not saving. In other words, not aligning our use of capital—in terms of spending, saving, and investing—with what we say is important to us.

Nobody’s ever taught us how to do this. So, it’s time we teach ourselves.

And this week’s very simple, narrow, focused lesson is just this: Talking about money equals talking about feelings.

I really want to emphasize this idea. My friend Ron Lieber, who’s the editor of the Your Money section of The New York Times, has seen more of my work than anybody. He’s edited hundreds of my articles and seen hundreds of my sketches. But he only has one of my sketches hanging on his wall… and this is the one.

Which leads me to believe there’s something important here. 

If money is all about spreadsheets, how does greed fit in your spreadsheet? How about fear? How about the concern that you’re not going to be able to provide the life for your kids that you hoped? 

Those are all money issues wrapped in feelings. Or are they feelings wrapped in money issues? Either way, the point still stands. Money = Feelings. Not math.

The sooner we realize that is true, the sooner we can begin having realistic expectations around what it’s like to talk about money.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

This one is for all you yogis, meditators, and Buddhists out there. You want to achieve enlightenment? The key is not in down dogs and green smoothies. The key is budgeting.

I know that sounds crazy. But take it from Thich Nhat Hanh, “Budgeting leads to enlightenment.”

I’m just kidding, Thich Nhan Hanh didn’t say that. But he did say, “Awareness is like the sun. When it shines on things, they are transformed.” 

As any good scholar of Buddhism knows, awareness is the key to enlightenment. Well, what better way to become more aware than by budgeting? 

Being aware of our spending is one of the most powerful tools we have to become aware of ourselves. And really, that’s all budgeting is! It’s simply being aware of our spending.

I don’t run into too many people who love to budget. And when it comes to co-budgeting with a spouse or partner, there’s a good chance at least one of you will actually hate the idea.

And yet, anyone who takes the time to think about it would agree that spending money in a way that’s more aligned with our values will bring us more happiness. 

So why aren’t we doing it?

1- It’s not fun.
True. But remember, as Stephen Covey says, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.” Budgeting is how we make sure our spending ladder is leaning against the right wall.

2- I already know where my money is going.
No, you don’t. Sorry. Unless you track your spending, you don’t have a clue where your money goes. Everyone I’ve ever seen go through the process of tracking spending for 30 days usually ends up saying some version of, “I had no idea I was spending that much on X.”

3- I’m not sure I want to know.
I think this is the biggest mental hurdle. The reality is that as we become aware of what and how we’re spending, we’ll find some things that surprise and bother us. Then we have to decide: Do we want to change?

The answer to that last question is… Yes! Of course, you want to change! 

Why else would you be contorting your body into weird shapes in a heated room with people chanting “Om” at you? Right? The whole point is to become more aware.

Just give it a shot. 

1- Try tracking your spending for 30 days.
2- Don’t stress about what app to use.
3- Just carry around a pen and a little notebook, and each time you make a purchase, write down what you spent and how it made you feel.
4- At the end of the month, go back through your notebook and just notice. Become aware. That’s it.

What do you have to lose?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Investor behavior matters a lot. In fact, it probably matters more than skill. To understand why this is true, first you need to understand one fundamental concept: Investment returns and investor returns are almost always different.

In 1999, I was working diligently doing my job as an investment advisor or financial planner (I was never sure what to call myself back then). As far as I understood it, my job was to search for investments that would generate above-average returns for my clients. That’s what the entire industry was built on, and really, that’s what clients thought they hired me to do. 

Above-average returns is called “alpha,” and finding even a little of it was worth any trouble. The search for alpha was why investment firms hired bright people and gave them bigger computers than the “other guys.” As I was searching for a little alpha anywhere I could find it, I ran across a little annual study done by Dalbar. This study attempts to find out how investors did compared to the average investment. You see, investment returns are not the same as investor returns. 

Investment returns that you see in the paper or in marketing material are based on the assumption that you invest a lump sum at the beginning of the period, and then you leave it alone. You do not buy or sell. You do not change your mind and trade to another fund. You just buy once and hold. 

Investor returns measure your real-life return. The return you earn as you buy and sell your investments, or switch from one investment to another in your search for the next hot thing (remember our search for alpha?). 

Well, for as long as Dalbar has been doing their study, the result has been shocking! The latest update is not much different from the one I read back in 1999. The study uses the S&P 500 as a proxy for the “average investment.” For the 20-year period ending 2007, the average investment return was 11.81%. The average investor return was 4.48%.

Now think about this for a moment: The entire industry is based on the idea that their job is to find the best investments, and in the process, they are killing the patient. The well-intentioned search for alpha is resulting in the average real-life person underperforming the S&P 500 by over 7%. That is crazy stuff. 

When I realized the implications, my entire job changed. I realized that investment success is not about skill — it is about behavior. I could not figure out why this story was not being told anywhere. I even remember reading an issue of Consumer Reports that went into great detail about how to save a percent on fees by buying no-load mutual funds. Then, buried in the article was one sentence that mentioned the Dalbar study and warned people about this 7% problem. 

Three pages devoted to saving a percent, one sentence that mentioned a massive problem but offered no ideas for solving it! I started telling the story everywhere I could. I drew this sketch on the whiteboard in every client meeting and at every public speaking engagement.  

It turns out my job was not to find great investments, but to help create great investors. If all you had to do was buy good (versus great) investments and then behave correctly, that changes everything. I decided that the search for alpha didn’t matter (turns out it’s a fool’s errand anyway, but I didn’t know that at the time) if you lost 7% in the process just because of bad behavior. I decided to leave the complex task of finding the best investment to the smart guys with the big computers; I was going to focus on the simple problem of helping people behave correctly. 

It turns out that outperforming your neighbor is not about finding better investments, it is about behaving better. Wow, if this is true, think of what it does to your life. No more Jim Cramer, no more late nights after work trying to find the next Microsoft.  

If this is true (year after year, studies tell the same story), then the focus is really on the few things that you control. 

If this is true, your relationship with a financial planner should be based on trust.

If this is true, we can focus on the simple, but not easy, task of becoming a better investor.

The lesson is that investment success isn’t about skill. It’s about behavior.