Josh Richards "jrichard"

....and Why Wealth Is Best Acquired Neither Easily nor Difficultly
....and Personal Financial Literacy

I manage my own investment portfolio. For the most part, other than experimentation for educational purposes, I keep things pretty simple. I don't short stocks. I ignore options. My interest in the performance of the major indexes (e.g. Dow Jones Industrial, NASDAQ Composite, S&P 500) is mostly for entertainment purposes. I rarely consider fixed income securities (e.g. bonds, treasuries, etc), except during unusual situations when, effectively, due to the thesis of the investment in question, it really isn't a fixed income investment I'm making. I take long-only, and usually long-term oriented, positions in publicly traded stocks. Fractional interests in real businesses. Plain and simple.

My present approach, and seemingly most likely to remain permanent (though it will continue to go through maturity spurts as all good conclusions should), is based on quantitative fundamentals (i.e. the numbers on the balance sheets, cash flow, and income statements) combined with deep qualitative analysis. Purchase and sale price determination is based on a value-driven approach somewhat akin to Benjamin Graham, Warren Buffett, Third Avenue, Longleaf, Sequoia, Mohnish Pabrai, and others. The math is not rocket science. In fact, if it wasn't for the surrounding analysis, my eight year old could probably be taught how to do it. If I have to whip out spreadsheets and make lots of assumptions it's probably not the investment for me.

Call me old fashioned, but I invest to make money and that also means doing so as efficiently and effectively as possible. I see no reason to look at higher branches when there are inevitably enough low hanging fruit around (which also happen to be where I'm less likely to break my neck if I slip and fall). I enjoy investing but I also have plenty of other things I enjoy spending my time on.

With varying degrees of success I've been doing this for the last decade. Unfortunately it wasn't until the last two to three years that I finally really had enough of the pieces together to be able to deliberately and confidently make transactions in which I could be more certain that the outcome was due to my careful analysis over simple dumb luck. So my lessons have been both highly profitable and, alas, combined with others, highly expensive. i.e. I'm not (economically) wealthy yet. :-)

I wouldn't take any of it back though for anything. Not even a million dollars. Why? Glad you asked. :-) Two main reasons, more to lose and priceless lessons, which are sort of just opposite sides of the same coin. You see if I'd started with a million dollars the lessons would have been proportionally that much more expensive. Investing is a cumulative learning activity where you can learn a lot from your mistakes and where constant reading, honest reflection, and careful analysis is necessary. It's also useful to have a long-term perspective and understand that short-term performance is not something that can actually be extrapolated from in estimating long-term performance. (Side note: Rarely do things go quite as planned, especially so in the short-term. In the longer-term, things are usually closer to plan. So, uh, plan accordingly?).

If I had started with a million bucks I'd not only be much poorer than I once was (relatively speaking) but I'd also have spent even more on those priceless lessons I've learned along the way. Worse, I might have been just too risk-averse to even learn some of the lessons I have -- after all there would have been more to lose. The lessons may have been priceless but it's still much easier to earn a few thousand (or tens of thousands) back than a million or two when you have to start all over from zero again.

Another thing I like about this path is that extreme wealth, without having great and painful lessons along the way to achieving it, can often make one too conservative and controlling and naive for their own long-term economic good. For example, having all your capital tied up in fixed income securities forever won't do much for increasing your buying power. (Or, I suppose, not being controlling enough is also a problem if you are a spendthrift partier which is really the exact same problem manifest in a different form).

Even if one has painful -- but useful -- lessons one may still not reflect upon them properly and/or for some reason or another not behave economically rationally when the rubber actually meets the road. Unfortunately the same is true for most of us who have never truly achieved significant wealth. We usually have incorrect or irrational attitudes amount money and wealth, managing it, saving it, growing it, etc. We are just as bad as many of the folks that inherit their money without good parental financial teachings or, at least, innate (rare) financial intuition. We just aren't quite as first hand knowledgeable that we're pissing all our wealth away. i.e. We don't have the historical memories of seeing all the zeroes in our bank account balances and thus we are even less convinced we even have the potential to have larger bank accounts ever -- lot alone again. We're more ignorant of our potential because we didn't have it once then lose it (yet). :-)

While you can't deposit potential in the bank, having it and not capitalizing on it (oh, a pun, heh) is just as awful as already having lots of wealth and pissing it all away. And, if you really stop to think about it, it probably hurts just as bad too.

I suppose the conclusion is that becoming wealthy should not be too hard nor too easy and it's important to pay attention to the hard learned lessons along the way without getting too down on oneself. At least if your goal is to achieve wealth and "keep" it.

Unfortunately, probably much to the chagrin of economists, we humans are not economically rational beasts as a rule. We're so full of exceptions, biases, heuristics, assumptions, etc, at least if my own experience is of any commonality, that I couldn't even begin to comprehend what rules we all do operate by. Collectively we're fairly economically rational but individually we're not so much. In some ways, that explains why wealth, at least great wealth, tends to collect in fewer hands rather than being broadly dispersed. This seems true not only within wealthy societies but geopolitically as well as best as I can tell.

So, anyhow, this brings me to the one investment, wealth, and personal finance related topic that I have been struggling with. You see, I get freaked out a lot these days when I talk to friends, family, and various other folks about their investment portfolios. Not because I think I'm super smart investor guy whose feet everyone else should bow to. Feel free, however. j/k :-). I just happen to have already learned the hard way (and, because I discovered a deep interest, and tried to take it up a notch as well, I'm ultra-aware of this problem domain).

Let's get more specific. It's not uncommon to hear that someone has bought some stock for their portfolio and their reasoning -- and it's usually the extant of it -- is that it's a "cool company", "someone I know told me about them and I trust their judgement", "growing lots", "in the news all the time", "safe bet that can't lose", etc. etc. Yeah, that's great but what's the investment thesis? How can one be sure the price paid was realistic? How will one know when it has reached or exceed fair value (at what price shall it be sold)?

Oh, yeah, that. Buying a security without an idea of what it's worth is like saying you'll consider yourself happy when you're successful; We can all understand the words in this proclamation, their individual meaning is straightforward enough, but the sentence is too vague to be beneficially to anyone including the person stating it. Define success my friend before you attempt to achieve it. Keyword being before.

Just because, and even if you are "right", the stock of a company you bought goes up in price after you buy it doesn't mean it'll go to any particular price. Buying stocks is not as simple as saying "I'll just buy and sell when it goes up". Goes up to what exactly? Oh, double what you paid for it? Well, any idea if the company is even remotely, even under the most optimistic valuation, worth that much? One in this circular situation may be relying more on hope more than prudence. Worse, they are guaranteed to not be able to remove emotion from what should be an entirely business-like transaction. It's hard to remove emotion from the transaction when the initial purchase reasoning was hardly a step beyond that.

Another metaphor at the risk of beating a dead horse: Committing to a project, without confirming the project is even worthwhile, and stating at the same time that we'll consider it complete when it's done. We'd probably define "done" somewhere. Perhaps we'd use a metric of some type or at least some outcome that is a bit more readily identifiable and tangible. Oh, and we'd probably not want to spend our time on the project if it's not worthwhile (e.g. overpriced or just not the optimal return for the risk or, worse case, pure hype) so we'd make sure to evaluate that before we jump in too.

It's not that any of these people are stupid. Mostly they are in different businesses of their own, they are busy enough with enjoying their lives, they just have no time regardless of interest level in understanding this stuff, they don't know any better and take too many clueless folks or conventional wisdom articles at face value, they have zero interest in understanding this stuff (nothing wrong with that), they think hiring outside assistance is too expensive, etc. None of them is stupid at all. They just have other things going on.

So a goal I have is to figure out how to help improve the overall personal financial literacy of the populace. After all, we're all in this together and zero-sum game or not (depending on your view), there's plenty to go around for us all to be more than well off.

-jr