Sorry, You’re Not That Good With These Numbers. On the subject of Finance & Investing

On morals, market timing and letting go. You can’t predict the future. Where’s my mouth at?

For a long time, all things related to finance seemed morally tainted to me, until I started changing my mind around 2015: the in defence of finance and finance followups posts by Jakob Falkovich¹ finalized the process. I mention them as they are interesting enough in their own right to warrant a mention here. I’ll only pick one quote from them:

I have an alternative explanation: Finance is the miracle glue that keeps our civilization intact. No one understands exactly how it works, so fucking with it in any way should be terrifying.

Having re-evaluated my moral qualms, I got a quick bout of overconfidence, which xkcd succinctly has nicknamed as an engineer syllogism:

All this was still before the pandemic: when it hit, I (re-)discovered, as did others, how clueless I really was.

What This Is Not

This page does not aim at telling you what you need to do, except reading stuff and being critical! Rather, I’d like to suggest that you probably:

• aren’t capable of predicting the future
• aren’t as smart as you believe when it comes to financial matters
• don’t have the time and knowledge to correctly figure everything out by yourself
• still want to learn about the subject because it’s important, both to you in particular and everyone in general!

I’m also writing this up because I wish I had given more attention to this subject at the beginning of my career: for many people in software engineering I know, our first salaries represent a leap in wealth that our direct environment (family, friends – and workplaces for whoever does not work in a bank) has not prepared us for.

This is also meant as a starting point: I invite you to regularly read up on this subject in order to develop a little sense of what lies behind the curtain of the everyday financial news cycle (hint: mostly noise!).

To financially literate readers: please be warned that by the end of this page you may think of me as a slight moron. To the ones I know, I hope our friendship will survive this!

Arbitrary Reading Material

My opinions and views around the subject are partly informed by the following books, as well as some observations of my own behaviour. Note that Benoit Mandelbrot is already mentioned in The art of the software long view for his comments on time-compression, one of the things that is so good at kicking your intuition in the teeth.

The two first books, in bold, are the ones I especially recommend on the subject of investing.

I’ve read a few things by Ray Dalio but haven’t yet gotten the time to crawl through his latest Principles for Dealing with the Changing World Order. Mentioning here because I liked the excerpts I’ve read so far.

Of course, I’m not making a claim to comprehensivity: there are many more interesting books out there. Please let me know if you think I’m missing out on something important.

Financial Pot Pourri

Things below are inspired by my book- and online-reading as well as the odd random discussion. Again, let me reiterate that I’m note a financial expert: consume at your own peril and keep your wits awake!

The Humbling Question

Now, to everyone believing they are smart and can feel where the markets go, consider this simple question:

In late 2019, where would you have predicted the market would be one year later, if you assumed a pandemic was to hit the entire world?

Would you have guessed at the new all time highs and crazy tech stock rallies that happened in 2020? And let’s not even start with the latest batch of world events.

I’m just asking: can you really predict the future?

On Timing The Market

Speaking of the pandemic, I have a good example illustrating how timing the market once is not enough: you’ll need to do it multiple times if you want to outperform simpler approaches (such as index funds)³.

Early in 2020 I sold most of the equity I owned (not that I had very much, mind you): my gut was telling me that if China was locking down 10% of its population, furthermore in one of the most crucial parts of its manufacturing hubs, we were heading towards a world of pain.

Great: I was correct (though it could have been luck, too), but when markets bottomed out I was still convinced it wasn’t over. So I missed on most of the way back up. I only ran into Seeing smoke (same Jakob as above) after the fact, which could possibly have helped me in that specific case.

Right once, wrong once: might as well have done nothing, the result would have been the same. The problem with being massively right once is that it makes you way too confident into yourself afterwards. And that’s where things get really dangerous.

Because no matter what, you can’t predict the future.

Frightening Volatility

My first dabbling in index funds was around 2016. I had read in multiple places that it was a sane, safe and low-effort way to invest. So I did, with a reasonable amount. A good month later the S&P500 index had grown roughly 10%.

Great success! Right? However, I told myself the following:

If it can go up 10% in a month it can also go down 10% in a month and I can’t stomach that for something that is supposed to be safe and boring.

I had yet to learn more about the psychological aspect of investing: the result is that I missed out on most of the crazy market of the 2010’s. (But the obvious question is: would I have taken advantage of it, had I been invested? Most likely yes: passive investing requires 0 actions.)

Whether you should pile everything into index funds on the cusp of what could be a massive recession is your call. Just remember that decisions are not all or nothing into a single investment though (see above).

And again, no one can predict the future.

Wild Money

A disclosure: I do own some stock that I chose myself. It pleases the part of me that believes me (us?) to be smart and I’m fine with loosing it all (or so I think: it never happened so I guess I can’t know?). As Ben Graham calls it, that’s my Wild Money Account and I keep it separate from the serious stuff.

I still hope for a payoff, though.⁴

But I can’t predict the future.

Pension Funds

Many experts agree that the future is unpredictible and that, especially around the subject of pension funds, things look outragely bad.⁵

Yet the exact same people will tell you with a straight face: “With your current pension plan and salary, this is the monthly retirement payment we will guarantee to you in 30+ years time when you retire.

Right. In 30 Years. When the age of retirement might be much higher? And God knows what happened to the world? If you’re enclined to believe the dude (sorry, never saw any woman in that position – in this case it might be for the best!) from the pension fund, check-in with your parents or anyone you know who is shortly before or after retirement age: ask them what they are getting compared to what they were expecting to get, and especially how that evolved in the last ten to fifteen years.

You👏Can’t👏Predict👏The👏Future

Cryptolulz?

Circa 2017 I played with these new so called “currencies” and got to experiment the associated psychological pains and joys in their full swing.

I made some profits, took them to pay for a couch and have since mostly given up on this.

If you’re convinced this is the future, go check out web3isgoinggreat.com, this little paper by NNT (aptly called the B*tc0in black paper), and get acquainted with the writings of Stephen Diehl.

It might still end up working for whatever reasons, good or bad: remember, no one can predict the future.

Inflation?

That’s the hot word currently on everyone’s mouth. Are the cryptographic dimes part of the solution? I would not bet so: see above.

But hey, I can’t predict the future, so I might be wrong.

180 Years of Market Drawdowns!

For a quick historical perspective, there’s this excellent presentation by Robert J. Frey entitled 180 years of market drawdowns.

Remember that thing about the future?

What others do?

The few people I know who aren’t as financially illiterate as I am may not agree with everything here, but the constant I hear and read is generally hold on to the shit you bought, if you’re bailing out at the slightest turbulence you should not be doing this.

Here I’m reminded by this remark from John Bogle (not an exact quote, but the spirit is there):

Don’t confuse investment and gambling. If you’re not sure, it’s gambling.

Did I mention you can’t predict the future?

Cost Averaging And Sticking To Plan

Not all advice I’ve run into is aligned, but a common theme is whatever your plan is, stick to it and keep your investment schedule through thick and thin. Building the plan is another matter.

This way, you don’t need to predict the future.

Where’s my mouth at?

I’m into indexing and have money in literally a bit of everything. I check my numbers on a bi-yearly basis to reduce psychological effects. Most things are on auto-pilot: monthly payments to accounts that have pre-configured allocations.

My current take on things: the most precious resource I currently own is myself and my ability to earn money with my work. I’d rather trade massive possible growth with a better chance of backing me up if the times get really rough.⁶

Because… I can’t predict the future.

That’s It

Please note that I don’t have any conflicts of interest or affiliations with any of the parties I gave links to: the only thing I’ll ask if you really think I’m a moron is to tell me on Twitter.

To conclude: I’m not into the whole FIRE movement, but still think they have interesting perspectives on things. I’ve generally found the poor Swiss to have useful content – most recently regarding custodian banks for my pension fund while I’m not an employee. Please note that I’m not affiliated to that site in any way either, and there are other similar ones.