Check out my bestselling book on habits, Superhuman by Habit. .
These past couple weeks represent the biggest shift in my understanding of personal finance in many years, maybe even decades. Things that never made much sense to me (and which I dismissed as foolish) now make a lot of sense, and my own plan for how I manage my finances has changed drastically. I also have a much greater understanding of what is happening in the economy (for example, why the stock market is so high when things are going so poorly).
It all started with Mark Zuckerberg. I read online somewhere that he bought a 6 million dollar house and got a mortgage for it. Why would you get a mortgage for a house when you're a billionaire?
This led me down a rabbit hole and made me realize that extremely rich people treat personal finance in a fundamentally different way than you and I do, and that their approach can be scaled down and used by normal people like you and me (if you're a billionaire and I have offended you by calling you a normal person: sorry).
Why would Mark Zuckerberg get a mortgage? Because his rate was about 1%, and he can earn more than 1% on his money. There's more than that, though. Mark may not have 6 million sitting around in a bank account, so he would have to sell Facebook stock. That's a hassle, but it also creates a taxable event. He has to pay taxes on the stock, assuming it has gone up. Now his house is more expensive. Instead he can just pay 1.05%, which is just barely over the inflation rate (and probably under the average inflation rate during the term of his mortgage), he can write off some of that interest, and he saves a bunch of money.
It turns out that ultra-rich people use credit like this all the time. The main mechanism is by taking loans out against their stock portfolios (or other liquid assets). If you want to get a loan with no collateral, you'll pay a huge interest rate (like a credit card). If you have okay collateral, like a depreciating car, you'll get a better interest rate. A safe fixed asset like a house gets you an even better rate. But the best rate of all? Portfolio loans. Even for normal people like you and I, it's possible to get rates in the 1.5-2% range (more on this later). And you can write off the interest, which means that wealthy people get about half of that money back. On really large loans the rates are under 1%, and when taking taxes into account they come in at well under the inflation rate.
Banks will do this because there's no risk of default. If your stocks start to go down and you have too much borrowed, they can liquidate your stocks and pay themselves back. That's a lot easier than repossessing a house. Banks can now borrow at just over 0%, so why not make a few fractions of a percent on a loan that can't possibly default?
It makes sense. Banks put out the loans because there's no risk to do so, and people take them because the loans make it nearly free to access money.
Of course, if their stock portfolio tanks, they're in trouble...
I have never invested any significant portion of my money in the stock market until very recently. There were a few reasons for this.
First, a quick primer on something I just learned. There are two types of gains in the market: alpha and beta. Alpha is essentially the capitalization on unpriced knowledge. If you count the trucks outside a chicken farm and realize there aren't as many as usual, you have discovered knowledge that isn't reflected in the stock price. You can trade on that knowledge and capture some alpha, which will then adjust the global stock price (in reality you probably wouldn't move the needle much, but that also means you didn't actually capture all that much alpha. A hedge fund could take all of it).
Also, there's beta. Beta is much less glamorous, but it's essentially the rising tide of the economy. Our capital markets generally work to move money from inefficient places (sitting in a bank account) to efficient places (being invested in a business which can turn it into products and services). This cycle creates value and some of that value is captured in stocks. Beta is the reason that the stock market really can keep going up forever.
Alpha is a zero sum game. If I earn $1000, someone loses $1000. Beta is not a zero sum game. Anyone can capture beta.
Everyone you know is trying to capture alpha, and they are all failing. Unless you are a very sophisticated professional investor, you are not capturing alpha. When people say "XYZ company is so much better than their competitors, so I'm investing in them", they are making a mistake. The market knows exactly how good they are, what their advantages are, and what their disadvantages are. That's why that company's stock is at whatever price it's at.
When people "win" by trying to capture alpha, what has happened is they've actually captured beta AND have exposed themselves to volatility by choosing an individual stock. That means that they will appear to have beaten the market, but if they do it long enough they will regress to the mean.
If you don't believe me, you can read more about this elsewhere.
I knew that people trying to capture alpha were largely misguided, but I didn't fully understand beta.
Common wisdom says to invest in index funds, which is a method of capturing beta. This is certainly a much better idea than choosing individual stocks, but it still didn't make sense to me. An index fund averages 9% over the long term, but sometimes exposes you to 30% or larger downswings. I have enough ways to make around 9% with less volatility, so I wasn't interested.
I had heard people talk about bonds, but I knew that they returned less than stocks on average, so I was even less interested in them.
Then I heard about something called the All Weather Portfolio by Ray Dalio. He's the manager of the biggest hedge fund in the world and is a writer who is best known for the excellent "Principles". Ray Dalio can chase alpha (he has a fund called Pure Alpha) because he is actually the best in the business and is the one finding real alpha. But he is also interested in beta, and that's what the All Weather Portfolio is for.
Beta comes from different sectors at different times. Sometimes stocks deliver all of the beta, but other times bonds do. By mixing stocks and bonds (and other uncorrelated assets), you can average out and get a steady drip of beta.
This process creates a much smoother "up and to the right" graph than just investing in stocks. Even though the mix doesn't return the same 9% per year, it may return 6% with only 1/3 of the volatility. The risk/reward is much better. What Dalio then did was apply leverage to the portfolio. Imagine if you could double everything (either through 2X ETFs, futures, or margin). You would then have roughly a 12% return with only 2/3 of the volatility of stocks along. Genius.
This post was getting really long and I still want to research a couple things, so I will continue next week with practical steps to implement this strategy. If you think I'm wrong about anything, please let me know on twitter or by email.
I will probably share at least a rough outline of my portfolio here and will share the exact portfolio as well as updates on my Patreon for inner circle members.
Photo is the Austin skyline. Sorry the post was late this week... I wanted to research as much as possible.
In other news, I think I'm selling the (still unrepaired) Bentley on Monday. Hate to let her go, but I got an offer I couldn't say no to.
I've been asked a lot recently about how I manage different priorities and how I translate those priorities into day-to-day actions. It's always a good question, but with many of us finding ourselves less distracted with travel and entertainment, the question is more relevant than ever.
Let's go through a quick exercise to help solve this problem in real-time.
First, write down the areas of your life that demand your attention or those in which you would like to make progress. A simple version might be
1. Work2. Fitness3. Relationship4. Social Life5. Learning
I've been studying Japanese tea ceremony for a little over a year now. The way you learn is by watching people who are better than you, trying to imitate them, and then receiving corrections from your teacher.
There are dozens of types of tea ceremony, but the simple ones you do as a beginner last for about 15-25 minutes, depending on how many guests you have and how quick you are. In that time you perform dozens of steps, and most of those steps have a lot of nuance to them, so you may have gotten a certain amount of water from one container to another, but you may have done it all wrong.
In that way, it reminds me a lot of ballet. There is a precisely correct way of doing everything, and even if you do it for years there is still room for improvement on even the most rudimentary movements.
At first I thought that I was great at it, because I received very few corrections. Then as I got better I realized that teachers usually only correct a couple of the biggest mistakes so that you have something to focus on. Like so many other subjects, you constantly realize just how incompetent you were just a few weeks ago.
As I mentioned in my last post, one of the things I did recently was move Sett to a new server. This is a task that I had every reason to do five years ago, but had been dreading and putting off. It was never that urgent, wasn't moving me closer to any major goal, but most importantly it just sounded like a miserable project.
The most daunting part of it all was that all of the software that Sett relied on was horribly out of date. I was two major versions of PHP behind, and each of its 5-10 dependencies was certainly either obsolete or out of date. Of course, as time went on this disparity became even greater, making me even less likely to want to do it.
At first this cost me about $170 a month, then I finally downgraded our server (but used the same image) to save about $40 a month. Overall, it probably cost me about $10,000 to not move servers! Even greater than this cost is the constant burden of knowing in the back of my head that I should move it and having to make the decision of whether or not to do the work.
Finally, in quarantine, I decided to take a stab at it. I resolved to spend half a day working on it and reassessing from there. If it was going to require too much of a rewrite I would try something else. It was hard to know exactly how long it would take, but it felt like a 5-7 day project to me.
I've been quarantining in Las Vegas for four months now, so I thought that it would be fun to write about how I've used that time so far, especially because I've done a few projects that wouldn't have gotten done if I weren't here for so long. Presented in roughly chronological order:
1. Rewrote lots of CruiseSheet
I'm not sure how other people do it, but when I create a new project I tend to just jump in and start making it. That means that some of what I start out with wasn't exactly suited for what the end result was, so I get a little bit of accumulated kludge. I had noticed that it seemed like the number of available cruises would slowly decrease over time, which didn't seem to reflect reality, so I took a deep dive on the data import section and found the error. While I was under the hood I also fixed a bunch of other minor things that had been bothering me for a while.
2. Got back on a perfect gym / eating schedule
I see a lot of people struggle with motivation, especially those who are already doing well. That represents a big loss of potential, as those who have already achieved some level of success are demonstrably able to channel motivation into output. I have some ideas on why this happens and also how to combat it.
While I think that it's important to be able to work with as little motivation as possible, there's no point in making things harder than they have to be. Working is easier and more enjoyable when we are properly motivated, so learning to motivate ourselves is a valuable skill.
It is possible, and maybe even preferable, to be motivated by work itself. I wrote a whole post called Love Work about this many years ago. If you are not able to love your work and be motivated by it, you are definitely in the wrong field. However, all of us go through periods of time when our immediate tasks are not overly motivating. I spent the last two weeks totally rewriting code I had already written, which is really hard to get very excited about.
Think of external motivation as the starter to your productivity engine. Work is usually most motivating when you're in the zone and in the middle of an interesting problem, but sometimes we need a push to get there.
A reader emailed me recently and asked how I'm able to have such a great group of friends who are so adventurous and into crazy ideas like buying an island and other properties around the world. I certainly don't take my friends for granted, but because I'm surrounded by them constantly I do sometimes forget just how unusual those types of people are.
I've said it a million times, but I do feel as though my greatest assets in life are my friends and family. This is, or at least should be, true for almost everyone because no other part of your life has the potential to bring as much joy as other people.
And yet... people don't really think much about friendships or put all that much effort into them. Think about how much proactive time and effort people spend on their careers compared to the people around them. Career is important, but not as important as people, and yet most people are far more eager to work on their career.
If you want to have an excellent group of friends, you must commit to that goal and be willing to work towards it, not just hope it happens (spoiler: it probably won't).
Beginning around high school, one of my major core values was paying the least possible amount for everything. I was always trying to figure out how to get things for massive discounts or to orchestrate some complex trade so that I got whatever I wanted for free in the end. I got so good at it that my first real income-producing business was in high school when I was buying and selling Palm Pilots and Apple Newtons. I started that business with the purchase of a $70 Newton and never invested more outside money into it.
Being frugal can be good. At it's best, being frugal is the practice of deciding whether you actually need something or not, whether it will be worth it to you, and carefully stewarding your money. Most people should probably be more frugal.
Over time, however, I realized that my frugality had turned into something different. I felt as though I didn't win unless someone else lost. When I went to a buffet, it was important to me that I ate so much that the casino lost money on me. Either I was the sucker or they were the sucker, and I didn't want it to be me. One of the best things at the Bellagio buffet was the pesto mashed potatoes, but I would only allow myself tiny amounts of them because I didn't want to fill up on cheap potatoes.
My business immediately after the Newton trading business was professional gambling, which was very much a win-lose situation. The casinos were trying to force me to lose and I was trying to do the opposite to them. The experience of being a professional gambler was very valuable to me, both financially and mentally, but I wonder if it helped ingrain into me that idea of not wanting to enrich companies.
I don't keep very close track, but last year I went through emails and discovered that I had purchased about 100 plane tickets for that year. Many were short hops to reposition and sometimes one trip would be three different tickets, but still-- that's a lot of travel. And now, I've flown twice in the past three months. Once to help my mom move across the country and once to visit some quarantining friends in Florida.
If you'd asked me a year ago what the chances were that I would fly only two domestic trips in three months, I would have said about zero. And yet... here we are.
It's rare to get such a big change in behavior, so I thought I'd write about a little bit, as much for future me as for you.
The biggest surprise is that I really like it. The first week or two was novel. The next two weeks had me searching the map to see if there was anywhere I could justify going, knowing that the answer was no. And since then I've been loving it. Paradoxically I can't wait to travel again and know that I will as soon as I can, but I also sort of hope the lock down keeps going for a while.
Before getting into this post, I should come clean: there was actually one friday about 450 days ago where I thought that I had already done the day's puzzle but I hadn't. So far that reason I haven't actually done the puzzle 800 days in a row, but rather 800 days with one day missing. Ok, it feels good to get that off my chest.
Three years ago my family came to visit me in Budapest. My younger cousin, with whom I tend to be both cooperative and competitive with on just about everything, had printed out a few crosswords to do on the plane. I immediately felt that if she was getting into crosswords I should also get into them, so we started doing puzzles together. The New York Times puzzle ranges from Mondays (easy) to Saturdays (hard). We were doing Tuesdays and Wednesdays with some difficulty, but it was a fun challenge.
Fast forward a few years and we both do the puzzle every single day (except that one Friday) and we share our times with each other. The rules are simple: no cheating, no using the built-in check or reveal feature, and the puzzle must be done before midnight EST. At first my extra ~15 years of experience on this earth played to my advantage and I would beat her almost every day. Now her intelligence and quickness has overcome that advantage and I win 1-2 times per week average. Some weeks I don't win at all.
Even if I'm not able to beat my cousin, I'm pretty good at crosswords these days. The last time I wasn't able to solve the daily puzzle was over two years ago, and my median times range from around 3 minutes for a Monday to 10-15 for a Saturday (lots more variance there, so I'm not sure). Besides being a lot of fun to do the puzzle (just like my daily Chipotle, I look forward to it all day), I've learned a lot through doing the puzzle.