Hello again,
I hope you are having a brilliant long-weekend, with chocolate eggs and all. This weeks entry explores a topic different from the first three: Finance. I know. I’m two pay checks deep into a real-life job and I’m giving financial advice. In any case, there is a real opportunity to learn something that applies to not only your financial decision making, but all decision making, in every domain. With this in mind, and in essence of a true finance bro, get your $9 takeaway flat white, Patagonia vest, and single AirPod ready.
Once again, I am truly grateful for your time.
Every job looks easy when you’re not the one doing it
From the outside looking in, it’s very easy for us to underestimate what it really is like to be in another person’s shoes. In this estimation, there is an element of overconfidence, we think it would be an easy job, and we can’t understand why they’re always complaining. A more prominent contributor to this estimation, is that humans are extremely poor at identifying the cost of success.
Define the cost of success, and be ready to pay for it — Morgan Housel
The cost of a decision, or pursuing a venture is often difficult to calculate until you have experienced it first hand. What makes it even more demanding is that the cost of your decisions is not always going to be monetary costs.
Whether it is investing, starting your own business, buying a new car, or taking up a promotion at your firm, there is a price to be paid. A new car has a very obvious price, maybe some that require a little more foresight in insurance and warranty etc., but generally it can be all there in front of you. The emotional cost — a cost significantly under analyzed, and significantly overlooked — of buying car is the complete transformation of your bank account, from an asset which brings you comfort and flexibility, to a desert that might see you scrambling to hold your life together.
Despite even an excellent deal on the car, the price at face value is not the only cost. Investing is the same. Invest for the long-term! That’s what plenty of people will tell you. Just dollar cost average, it’s just that easy.
For 50 years ending 2018 the S&P 500 increased 50-fold. It was as simple as dumping in your life savings, and enjoying the ride to the top. In reality, it was more like taking escalators 500 floors up. Every other day there was a chance it took you down a floor. During 9-11, the GFC and the pandemic, everyone investing for the long-term jumped in the elevator, it took you to the ground floor and you were kicked out the building. How would this make you feel?
Examples of this exist in so many different domains. People trying to get something for nothing. Many have aspirations of getting bigger, running further, and earning more, but they aren’t willing to pay the cost of making such decisions.
For example, The costs of getting bigger:
Training hard
Training consistently
Eating more
Less (preferably no) alcohol
Those who violate these terms usually get what they paid for. You cannot have your cake, and eat it too…
In business you see a similar law of nature. Those who cut corners, skimp and incessantly DIY to keep costs low will generally, given enough time, get what they paid for (which is not much). That isn’t to say you should be liberal in your use of limited resources, but it means at some point, you have to be willing to pay for the cost of success in order to grow and move the needle forward.
In traditional finance theory — blah blah I know.. just stick with me for two seconds — the cost of debt (excluding fees) is determined by the effective interest rate on the loan, or the total interest paid over the life of the loan. In reality, for common folk like me and you, the actual cost is a little something like this:
Cost of Debt = Interest Paid on the Loan + The fact that you won’t be able to sleep at night knowing you’re leveraged up to your gills, that your kids might not get any birthday presents this year or any other year because you will be filing for bankruptcy, and that your mental health is tanking because you made a shit decision
In other words, the cost of debt is as much a psychological one, as it is a financial one and should be considered in making decisions.
If you take only one thing from this, it is that nothing is free. Being a successful investor requires you to be willing to pay the price. Being successful in anything is to recognise that the difference between where you are now, and where you will be in 50 years, is not only to be paid in dollars, and when the bill is due, you must be willing to pay for it.
Actionable Tips
Fees, not Fines
In many domains, the true cost of a decision is not immediately obvious, and is never fully encompassed in the price tag. When the true nature of the cost is charged, it feels like a fine for making the wrong decision. We, as humans, avoid fines. Our avoidance of all forms of fines — speeding, parking — can translate towards avoiding what is often required for the success of a decision or a venture. We begin to avoid volatility, and uncertainty, because it doesn’t feel like we are being rewarded for our commitment, it actually feels like we are being punished.
Fees are slightly different. A fee is something people are generally fine with paying. You have to pay a fee to go to amusement parks, and most people who can afford it are willing to pay for it because they believe the price of the fee is outweighed by the potential reward of an amazing day. Very few people have the perspective that the cost of going to an amusement park is a fine for doing something wrong, so they are less likely to avoid it. The trick is to view the cost of success in terms of fees, not fines. If you convince yourself that market volatility or the effort of training hard is a fee you must pay to stay in the game long enough for it to turn in your favour, you’re more likely to pay it, and are more likely to enjoy it while playing.
Define The Goal
What is it you are truly wanting to achieve? In a world where you are spending (investing) your money on (in) things without a clear goal as to why, you leave yourself vulnerable to the highest levels of emotional stress with no protection. What makes it worse is that, because you have no goal, you can’t justify why this is a cost that must be paid, and therefore cannot even begin to regulate the emotional stress. When we have a clear goal, and our decisions are aligned with it, it gives us a life jacket during the times when luck hasn’t quite turned in our favour just yet. It allows us to overcome the emotional stress with grounded justification and planning.
Be Prepared
I know of no better life purpose than to perish in pursuit of the great, or the impossible. Where would the courage and greatness be, if success was certain and there was no risk — Friedrich Nietzsche
Be prepared to get dragged outside your comfort zone. Any decision worth anything towards making you more successful in any domain will feel uncomfortable. Pursuing a higher purpose challenges your innate desire to stay safe. When it is challenged, and you feel yourself being pulled into the realm of discomfort, recognize that this is what it’s supposed to feel like. It is supposed to feel physically taxing pushing yourself at the gym. It is supposed to be emotionally taxing watching your portfolio in a recession. It demands every bit of mental strength to steady the ship and push forth passed it, but you will be better for it.
Now, for some wise words from Jamaal Williams:
If you’re going to piss like a puppy, stay on the porch, and let the big dogs eat
Thank you Jamaal, very insightful.
Just Something To Consider
Bit of a long one I think. I hope you enjoyed.
Are you a puppy? Or a big dog? Food for thought…