If the holiday season fills you with dread as financial conversations emerge with well-meaning family, there is a way to make those moments more interesting, and less challenging. It comes back to understanding what someone’s money beliefs are.

I caught a taxi recently and as we started driving we encountered a traffic jam. “I hate this time of the year”, the driver said. “Christmas fever – everyone goes mad. It’s terrible!”

“What’s the likelihood of you enjoying the next four weeks?“ I asked.

“I doubt it,” he replied.

As I got out of the taxi, I felt sorry for him. Although understanding what he means, he has set himself up for an unnecessarily difficult time. He has convinced himself that the next few weeks are going to be crazy, that he’s going to have passengers arguing with him, and he’s not going to enjoy it – all because of his beliefs. It’s also likely that if anything happens he will use it to confirm his beliefs and exaggerate the impact.

Many people have the opposite beliefs about this time of the year. They love the holiday period. Often these people can be heard saying something like, “it reminds me of my childhood.”

The correlation between beliefs and outcomes is very high, and confirmation bias reinforces and conflates the outcomes.

Beliefs are formed in early years, usually from emotional experiences (particularly those where joy and fear are present). At the time, the emotion almost  ‘glues’ the belief to the subconscious. And it becomes very difficult to move.

Money beliefs are also correlated to outcomes, and many are likely to be reinforced during the holiday period, and it is at these times that family elders pass on their money beliefs to the next generations. The elders will never know the impact they’re having – their beliefs are ‘the truth’, so they’re doing the young a favour, right?

Whether a money belief will be supporting or limiting should be left to the believer themselves to determine. It’s not for the listener to decide. They have their own beliefs.

Limiting Beliefs
Overall, though, there are a number of beliefs that I’ve found are generally accepted as being limiting or destructive:

– “Good people don’t care about money, and aren’t materialistic.”
– “It just has to be done, regardless of the expense.”
– “The cost of the gift shows the value of the relationship.”
– “Money will solve all my problems.”
– “It’s only money.”
– “Your self worth equals your net worth.”
– “Somehow, it always works out.”
– “People judge you by how much money you have.”

More valuable and fun conversations
Unfortunately, research shows that the holiday period is a time of increased stress for many people. As family members get together, often having not seen much of each other in some time, conflict in conversations may arise. It’s often a clash of beliefs that each person in the conversation is convinced is the truth.

An interesting and fun change to these conversations is to raise the topic of money in the form of experiences.

“What’s your first memory of money?” is a question that elicits very interesting responses. Critical, however, is to let it flow without interruption. Be the inquisitive listener, nothing more. It’s not about telling them their memories are wrong or their beliefs irrational. It’s not about proving anything. It is simply about enhancing understanding and being interested.

After the story about their first memory, ask what impact it had. Then ask whether that impact has served or limited their relationship with money.
Even between spouses – there are insights to be gained and relationships will be enhanced. These are the conversations that can make family gatherings more enjoyable, and enhance relationships.

One of the most powerful and valuable learnings to pass on, is awareness.

When I think back to my taxi driver, I still feel sorry for him. He has chosen a job that puts him in the middle of the movement of people and as he wakes up every day, he sees the world through a negative prism. I wonder what the knock-on effects of his daily beliefs are on aspects of his life that are more important.

But maybe, that’s just what I believe.

How old are you as an investor?

Watching television recently, I learned about something called ‘the phenotypic age’. Apparently, it’s the physical age of the body, not the chronological age. It’s the age at which your body is functioning. Some people are unfortunate to have prematurely ageing bodies, and others are lucky. Some work on their bodies to keep them growing and others abuse their bodies and bring on premature ageing.

Blood tests measuring eight elements can now reveal how old our bodies are, and can accurately predict how long we will live. It would be interesting to have a test that measures how ‘mature’ a person’s personality is around money.

In my experience, some investors just do better than others — they take more risk, they accept costs, and they don’t panic when prices fall. They’re ‘mature’. For many reasons, and for reasons that are mostly not their fault, others struggle.

Three categories of investors

There’s a lot of research on investor behaviour and, in my view, investors fall into three categories. Those that understand what it takes to do well, and do it; those that have made mistakes and learn from them; and those that don’t learn from their mistakes, and keep repeating them.

The first group — the ‘adults’ — fall into two sub-categories. The first understands how risk and reward are linked. They’re not afraid of risk, because they understand the basics of capitalism. They know that they could lose money but they believe in the power of business and human beings to create growth. Some are very experienced at making money; others are simply used to the volatility of markets and have benefitted from long-term patience. The second sub-group of adults is accepting of the nature of markets, and trust the structure of their portfolio to others. They are relaxed, even though they are not experts.

The second group — the ‘teenagers’ — have made mistakes and although they have struggled, usually make improvements. They have often paid quite a heavy price, and have regrets. They wish they could have their time again — because they would have been multiple times wealthier. At least they’re on track and feeling better. They’re learning.

The third group — the ‘children’ — haven’t changed. They have made mistakes, but they continue to make the same mistakes over and over again. They don’t learn. Often it’s because they feel out of control. They usually follow the same strategy that doesn’t work, which could be the ‘get rich quick’ strategy that always blows up, or the ‘keep it in cash because the stock market is too risky strategy’, or the ‘pick an adviser because they seem nice’ strategy.

They either make excuses, or they don’t care. One way or another, this group is destined to fail financially and they need to be protected. Those around them will find it difficult.

Changing who you are isn’t easy

How do you become a member of the first group?

  • Become aware of your beliefs and where they limit your success
  • Get educated
  • Speak to people in this group – understand how they think, more than what they do
  • Start small – practice and entrench one good habit
  • Be clear about why it’s important to you.

How do you get out of the third group?

  • First, decide if you care
  • Then, accept it’s all under your control
  • Uncover your money beliefs
  • Don’t judge yourself
  • Create the life you want and set some targets
  • Get help, and hand over control – in the short term

Every investor is different. No matter how old they are chronologically, some always remain child investors. Unfortunately, like children, they will also end up dependent on others, and will give up their freedom. The best way to help a ‘money child’ is to casually discuss their memories and beliefs around money and help them to remove any blame. Then focus them on what kind of lives they want, and finally, on the strategies they need to implement. It needs to be their decision.


Aviate, Navigate, Communicate

Soon after I got my private pilot’s license, I subscribed to a monthly publication that outlined aviation incidents and accidents. I initially read them as a dutiful new pilot, but soon it was more for the incredulous stories. Most loss is caused by human error and most human errors are the result of stupidity, not risk. ‘Stupidity’ comes from losing control under pressure.

There was one guy who decided to impress his mates who were having a barbecue on the side of a river. He thought it a good idea to fly up the river and under the power lines — he clipped the tail of the aircraft and plunged to his death.

Some accidents are due to aircraft failure, weather, or someone else’s fault, but a surprising number are pilot error. The key principle taught to new pilots regarding how to deal with pressure is “aviate, navigate, communicate”. In other words: first, keep the aircraft flying; then worry about where you are going and only then, talk to the people involved.

I had the unfortunate necessity to use this principle twice in the air. On both occasions we had engine problems – both were life-threatening. In fact, the second was a take-off from a bush airfield in the Kruger National Park with my family on board, and we were flying at treetop level. ‘Aviate, navigate, communicate’ kept me very focused.

This simple principle can be adapted to any situation in order to reduce human error. All it does is help you remain sensible to give you the best chance of a successful outcome. Why make it more difficult than it needs to be.

A critical first step, however, is to be aware of the situation in which you are operating. Known as ‘situational awareness’, it’s the ability to be aware of where you are, what’s happening around you, and whether anyone or anything is a threat. And if there is a threat, having a method to remain in control in order to deal with it.

There is an enormous amount of research that shows that investor behaviour is the greatest contributor to investor returns. When asset prices fall, investors panic. They lose control of their emotions and their decision-making suffers. Money is highly emotional and as a person’s wealth or their perception of their wealth changes, their emotions are exaggerated.

Under financial pressure, ‘cash flow now, cash flow future, communicate the plan’ is similar to the pilot’s mantra that can be used. ‘Cash flow now’ is all about surviving the short term; ‘cash flow future’ is where your revenue will come from in the future, and ‘communicate the plan’ – keep everyone in the picture.

There is always a perception of risk but in reality, the past 10 years have been particularly benign. Recent times have been more testing and as usual, we have seen a higher number of views on how to deal with it both with our clients and across the market.

The principles or mantras I’ve discussed will apply to any situation. I used them when teaching my children to drive. “Aviate, navigate, communicate” I would say in the car. “If you’re in the car with your friends on a Friday night and you’re all excited, remember that if anything goes wrong, focus on driving the car, then pull over or turn down a side road, and then worry about your friends”.

It’s worth simulating or introducing a stressful situation to help learn. For her first lesson, I took my daughter on a two-hour drive on a Saturday morning down the busiest roads in Sydney. “What’s the worst that can happen?” I said to her. “If you’re feeling pressure, just slow down and drive the car – they’ll hoot at you, but who cares as long as you’re in control of the car?”

Being able to master emotions can help you focus on the necessary outcomes from any decision you may need to make. Being able to take control in a stressful situation can only help further, whether you’re struggling to land a damaged airplane or managing finances in a downturn.

The October Effect

Is the ‘October Effect’ real?

The human mind is the biggest obstacle to on-going, long-term successful investing. It’s a phenomenon that impacts not one investor, but many, all across the world — for an entire month. Welcome to the ‘October Effect’.

It’s been another volatile October! What is it about October over all other months? The stock market crash of 1929 started in October and ushered in the Great Depression. Black Monday 1987, also October, was driven by computer trading and portfolio insurance and in October 2008, the S&P 500 Index lost nearly 17% — the biggest monthly decline of the GFC.

Few would know but there was also a minor panic in October of 1907, during which the Dow Jones Index lost 15%.

It’s no surprise for those that subscribe to the ‘October Effect’ – the belief that the stock market often declines in October.

There are many theories about the stock market, and the October Effect is just one. Each is compelling and difficult to resist, especially when being explained by a keen proponent. On the other hand, logic suggests that if any were correct, all investors would soon follow and it would lose its impact.

The October Effect

Besides the October falls mentioned above, between 2009 and 2017 we experienced three October declines, each losing just under 2%. In the six periods that saw an advance, the S&P 500 averaged a 5.3% advance.

This year was different. In October the S&P 500 Index gave up 6.9%.

Even though many think that it was the result of the October Effect, the 2018 price fall could have been the result of a number of factors, or a combination. The US market has had a 10-year bull run without a correction, whereas corrections occur on average twice every decade. Investors are getting nervous. The Fed chairman Jerome Powell’s comments that the fed funds rate is “…a long way from neutral at this point”, alludes to the fact that China is slowing down and growth in Europe has softened, implying that firms doing a significant share of business with these regions could face reduced profits. These concerns, together with the nervousness around October, can cause price falls.

Investors who believe in the October Effect would completely discount the S&P 500’s 8% advanceinOctober2015, or the fact that from 1970 the broad-based index of 500 major US stocks has averaged a gain in October. In fact, October ranks number three in performance when using the median return.

In case you’re wondering, on average, September is the weakest month.

But why does it really happen?

My view is that there is, in fact, no difference between October and any other month. The October theory is based less on evidence and more on what psychologists call ‘availability’ — the human tendency to judge how likely an event is by how easily we can recall vivid examples of it; and framing, where “people react to a particular choice in different ways depending on how it is presented”.

Defensive assets generally do better and stock analyst earnings forecasts are less optimistic in autumn and winter — the darker months.

In other words, investor psychology is the real explanation of price volatility. Successful investors are those able to not only understand the psychology of investing but also be aware of when it’s having an impact on themselves and others.

Human beings find it remarkably difficult to simply allow a set of facts to exist in a vacuum. There is always a need to create a story to explain the facts.

It happens all the time

The S&P 500 lost 9.9% from closing peak to trough (20 Sept to 29 Oct) and although it’s never pleasant to watch the value of a portfolio fall, the fall was actually quite modest.

A fall in prices during the year is not uncommon. Since 1980, the average drop from peak to trough in the stock market during the year has been 14% and in recent years, we’ve experienced a number of sell-offs. The stock market has weathered Brexit, the European debt crisis, China worries, the Ebola scare, the Japan earthquake/tsunami/nuclear disaster, US debt downgrade, and much more.

When in doubt, rely on what’s indisputable

Shares are much higher today and over time will continue to rise. Capitalism is one of the laws of humanity (in my personal opinion), and capitalism suggests that companies as a whole will continue to make a profit and will, therefore, have a long-term upward bias. The over-optimism or pessimism of human beings will be reflected in the prices, and those that can discount both and resist the illogical theories will avoid bad decisions and benefit the most over the long term.

Decisions should be based on factors that can be explained and are easy to understand, not on fanciful theories — even though they are sometimes fun to hear.


Hot Days Lead to Bad Decisions

Awareness around factors that lead to bad decisions can help investors remain cool when markets heat up.

As we move into summer, we are starting to experience some very hot days. Anecdotally, everyone knows that we all get a little more cranky in the heat — but there has been much research on the topic. In fact, one study in the USA on the impacts of hot temperatures on road rage showed a direct correlation.

It must have been a fun study to do. The research team purposely irritated drivers by remaining stopped at green traffic lights and then measured how many people honked their horn and shouted abuse on days with varying temperatures. They also measured the difference between cars with windows down (the assumption being that air-conditioning was not being used), and up. It must have almost been like Candid Camera.

Called ‘heat hypothesis’, there is statistically a direct link between hotter days and greater ‘behavioural errors’. Another study in Spain showed an increase in road accidents of 7.7% on days of extreme heat. There is also a correlation to murders, assaults and car thefts.

Awareness of additional risks is the clear antidote to being susceptible.

Poor decisions often come from a poor decision-making environment

Lead researchers discovered that the real cause of the increased road rage and violence is that heat causes discomfort. When uncomfortable or out of the comfort zone, human beings become irritated and emotions are heightened. This often means the survival instinct kicks in and threats are exaggerated.

Money is similar to heat — it exacerbates and exaggerates emotions

With the markets and asset prices becoming more volatile, but no consistency of themes occurring, we are seeing more and more behavioural errors occurring. The environment within which investment decisions are being made is becoming less conducive to good decisions, and a number of common behavioural errors are the result.

Myopic loss aversion: Investors experience emotions of losses twice as significantly as those of gains. As a result, when prices become more volatile investors become too strongly focused on short-term losses and exaggerate their impact. Together with recency bias (where investors assume the recent past will persist in the long-term future), this emotion often leads to the error of making rash short-term decisions which have a long-term cost
The antidote is to reframe the short-term losses. For example, by looking at the frequency of previous similar losses and the subsequent recovery, as well as refreshing the principles on which market returns are based.

Mental accounting: In their heightened emotional state, investors evaluate their investments separately rather than as a portfolio. They look at each investment in a time-specific way, expecting each to be doing well all the time. The emotions of mental accounting, when combined with loss aversion, result in investors holding onto losers and selling winners.
The antidote is to focus on the returns of the portfolio rather than individual returns, and on the quality and diversification of the underlying assets.

The halo effect: The uncertainty of a volatile market leads investors to seek out a ‘hero’. At the same time, ‘experts’ expound their theories in the media, which together with the local grapevine, leads investors to look for the silver bullet. The impact of this effect can be seen when companies with familiar names trade at higher valuations than companies or ticker symbols that are more difficult to remember. The likeability of a CEO has a similar impact, as does the endorsement of a well-known investor. As I often say to our clients, “trust the process, not the people”.

Volatility doesn’t mean long-term outcomes should be poor

The past 10 years has been a particularly benign and fruitful period for investing. Volatility has been lower than average and returns higher. On a relative basis, it is unlikely to be as good over the next 10 but this does not mean that the final outcomes should be any worse.

The greatest contributor to investment returns is investor behaviour, and the greatest contributor to quality decision-making is awareness. As we go into a hot summer and more volatile prices, those that have the awareness that hotter days lead to hotter emotions — and therefore greater risk — will be less likely to make bad decisions.


The Compounding Effect Of Fear


During British colonial rule in India, the government began to worry about the number of deaths caused by wild animals and in particular, venomous snakes. The government of the day decided to solve the problem by offering a reward for every cobra brought in to be killed.


Indian citizens didn’t take long to take advantage of the system and began breeding cobras. By the time the incentive was withdrawn, there were more cobras than at the start.




The Great Depression was a traumatic time and left a lasting impact on many who lived through it. Understandably, they feared ever having to live like that again.


These people, nowadays mostly over 70 years old, have always been extremely frugal in their spending and conservative in their investing. Even those who are in their 80’s and have more capital, remain frugal – keeping their money “for a rainy day”.


The irony is that by so badly wanting to avoid losing money, they have consistently worried about it and by being so frugal and conservative, lived materially inferior lives (compared to what they could have lived).



So how do you prevent being the cause of your fear becoming your reality?


The British in India should probably have just accepted that cobras were a potential risk but statistically, not a very big one. Understanding more about cobra’s habits and the circumstances under which they became more dangerous would have reduced their anxiety – as education always does. And lastly, having a medical emergency plan to deal with bites.


Human beings are almost hardwired by the time they reach adulthood. It becomes very difficult to change, even when the desire is strong. Money, and their relationship with money, largely exacerbates this hard-wiring, especially when emotions are piqued.


A drop in the value of assets, and the corresponding emotional stress that is triggered is just such a time. For some investors during this time, they lose control in their panic to protect their lifestyle, and by their actions, they create their nightmare.



Just like the British, investors who are susceptible to these types of emotional responses, should first, accept the fact that prices will fluctuate, then gain more understanding about how often it happens, how long it takes to recover, how to reduce the impact, and finally, have a plan to deal with an emergency, no matter how remote.


The answer is not to pretend the fear doesn’t exist or that’s it’s totally unreasonable. Either would result in more anxiety and ultimately, worse decisions. It’s preferable to accept the concern and treat it with ‘respect’. But at the same time, it’s useful to keep it in perspective. There are no absolute guarantees, but gaining a realistic understanding of the probabilities and mapping out a worst-case scenario goes a long way to remove the possibility of poor decisions.


I have personally found that when I stopped killing spiders and bugs, I began to fear them less. We fear what we don’t understand.




Every Asset Needs a Purpose

I have a friend who is a very good golfer and at one time was the distribution manager for McGregor golf equipment. He absolutely loved the game and golf equipment, and we had a lot of fun as golf partners.

After going to a golf equipment convention in the USA, he came back with the option to take up a Mizuno agency. He was really keen to do it and convinced me that there was a gap in the market. His plan was that I should invest the capital for the stock, and we set up a business distributing Mizuno golf equipment.

The business struggled from day one and we persuaded ourselves that it was just teething problems. At one point I invested further as we changed strategy.

It took a while for me to be honest with myself, but when I finally did, I realised that the truth was that I was supporting a friend and trying to make a business out of a hobby. These conflicted and confusing objectives were costly.


It’s easy to confuse the purpose of assets
“In any If you don’t know the purpose of an asset, you can’t determine its required return and therefore the most appropriate and optimal strategies. It’s easy to get confused. As every asset or venture requires money, whether it satisfies an emotional purpose or not, the investor would ideally like at least a return of that money.

Psychologically, it’s very difficult to accept a loss in return for satisfying an emotion. It is equally difficult to accept an inferior return – so it’s often justified as something else.

Every asset should have a purpose, and the owner should know and understand its purpose. It’s okay to make a choice where a financial return is forfeited for a return in some other way. It’s not okay to have an expectation of a good financial return, as well as satisfy emotional needs.


Four broad categories
There are four broad categories of assets: lifestyle assets, investment assets, speculative assets, and business assets.  The simplest test of whether an asset is for lifestyle is whether the owner would dispose of it for an alternative if a better return was available. Few people would dispose of their homes to invest for a better return. A boat, car and farm land often fit into the same category.

Investment assets are assets from which market returns are expected. The decision is usually a probability-based one and the benchmark is the market index.

A speculative asset purchase is one based on an opinion rather than probabilities. There is an extra layer of risk, and a return over the market is required.

Business assets have additional layers of risk and cost and therefore need additional reward. Besides the high risk of failure (statistics show that only 33 per cent of businesses survive 10 years) but also time and concentration risk, they therefore need a return above speculative assets.


Leads to unnecessary losses
Confusion is common and costly. For example, a business that’s actually a job – often small professional services ‘businesses’ have no value without the partners. The partners convince themselves that it’s a business with value. For example, an interior design business owned by one person that employs two. The owner charges fees based on time or project. It’s a job.

An investment property that is actually a lifestyle asset. I recently had a client who owns two apartments that are generating a very low yield. The justification given is that eventually each of the children will take over as the primary residences. So they are actually lifestyle assets.

A business and investment that’s actually lifestyle. Picture an aircraft business with commercial land that can’t be developed, and a manager who is a close family friend. The business isn’t making money and requires regular injections of capital. It’s a lifestyle asset.


A lack of clarity results in waste and unnecessary anxiety: trying to save face, a breakdown in relationships, and the loss of money are just some.

The second tranche of capital that I invested in the golf business was really to save face, and a friendship. In the end, I couldn’t save face and the friendship was damaged, as neither of us were happy when I ended the adventure. Understanding the type of asset I was investing in, from the beginning, would have avoided all the subsequent hard lessons learned.


Rules of Thumb are Sometimes Dumb

Justin Hooper conveys ‘the importance of personalising rules of thumb’

I was reading an article this week about how much retirees need relative to their previous earnings. According to the article, the right amount is 70-80% of pre-retirement income. It’s not the first time this number has been used – but is it correct, and where does it come from?

In my experience and the reading I’ve done, the estimated range is enormous. In one research report I read, respondents were asked to outline the lives they wanted in retirement irrespective of what they were earning. Turned out that on average they needed 130% of pre-retirement income. I suspect that the rule of thumb on how much one needs in retirement has come from how much most people have accumulated, not what kind of lives they really want.

Often, the conventional wisdom creates an incorrect target and ironically then becomes reality which reinforces the rule. It got me thinking about “rules of thumb” — which ones are valid, how to use them, and some that I have created.

Rules of thumb are meant to be broadly applicable, but when handed down as the wisdom of elders they can be very dangerous.

Don’t  just accept them
At a Christmas lunch one year, a young girl asked her mother why she cut the ends off the pork roll before putting it in the oven.

“That’s what my mother taught me to do,” mum said. “She’s here, so let’s go and ask her.”

“When I got married, we didn’t have much money and I had to use the same pan for everything,” grandma explained. “The pork roll was too big for my pan so I cut the ends off it.”

Rules of thumb emanate from the practical insights of others. Most (particularly older) people will have developed some during their lives and many are adopted from parents. They’re supposed to provide guidance; they’re not based on scientific study. They’re applicable broadly and can be useful, but there are always exceptions.

Hard to ignore when expounded by an ‘expert’
At one time in my career, I worked alongside an adviser who was previously an actuary. In my mind, my actuarial colleague had an aura of authority about him which meant that his rules of thumb were accepted without question – for a while. One of them was how much insurance people needed.

“Thirteen times their annual expenses,” he said. It took me a while to challenge this and when I did, I found very little substance behind the rule.

At another time in my career I briefly worked for a company who had as one of its directors a big finance media personality. The rules of thumb he expounded around retirement were also wrong (in my view, anyway). Retire at 55 and you need 17 times your annual expenditure, 15 times at 60 and 13 times at 65.

For these to be accurate, you would need to assume that you definitely don’t live beyond your life expectancy and the returns on your portfolio are better than average over your particular time horizon. And that’s another one that’s dangerous – planning to your life expectancy. There’s a 50% chance of living beyond your life expectancy, so planning cash flow to then has a 50% chance of failing

Question the rules
Rules of thumb cannot be implemented without question. Here are some that are worthwhile but nonetheless have flaws.

  • The 10% rule: Always save 10% of your salary. Doesn’t take into account when you started, what return you will get, and what kind of life you want at the end.
  • The 50/30/20 rule: 50% of your income goes to necessities, 30% to financial goals and 20% to choices. Depends on your stage of life. The ratios need to be adapted to different stages of life.
  • The 20/4/10 rule: When buying a vehicle, put down 20% as a deposit, pay it off in 4 years and don’t spend more than 10% on transportation costs. Don’t buy a vehicle you have to finance.
  • The 20% rule: ‘Put down a minimum of 20% as a deposit on a home’. Depends on your income relative to the cost of the home.
  • The Six-Month Emergency Fund Rule: ‘Have at least six times your monthly expenses in an emergency fund’
  • The amount of life insurance you need is five times your annual salary. Depends on the level of other assets and income.
  •  ‘100 less your age is the percentage of shares you should have in your portfolio.’ Depends on total assets relative to income required and emotional risk profile.
  • Here’s one that people in other countries apply and Sydneysiders will laugh at: “The cost of your home should be no more than 2.5 times annual income.” 

My  rules of thumb
I’ve come up with a couple of my own that I use daily.

  • How much is enough? 20 times your annual expenditure, (assuming you have a maximum 35-year time horizon). Another way of looking at this is double your lifestyle assets — you need twice as much in investments as the value of your home.
  • Changing home. Every time you sell your home and buy another, it costs one year of work. Here’s my theory – the costs of selling a home are 4% stamp duty plus around 2% commission to the agent – all after tax. That’s equivalent to around 10% pre-tax, and for most people, their annual income is around 10% of the value of their home.

Personalise rules of thumb to make them useful
The value in having rules of thumb is that they provide a benchmark that’s easy to remember. And there’s no doubt that having a benchmark influences behaviour. At the same time, for it to be believable, it needs to be personalised. Take the basic rule and tweak it to suit your purposes. Then apply it.


The Science & Art of Investing

Sending a man-made satellite to the sun is far more predictable than investing.  The uncertainty brought about by the behaviour of investors makes investment outcomes imprecise but not necessarily less successful.


In May last year I was lucky to visit NASA in Silicon Valley, so I was particularly interested to see the details of its latest mission to the sun. Called the Parker Solar probe, it will take just under seven years to complete 24 orbits of the sun, reaching speeds of 700,000kph. It will need to be able to withstand temperatures more than 1300 degrees Celsius as it goes as close as 6.1 million kilometres from the sun’s surface — and its navigational instruments will use Venus to adjust its course and slow down.

I understand that at the end of the day, it’s all calculations. But it’s pretty impressive how the scientists can plan a venture like this to such precision.

Investing is also full of numbers, so one would think it should be at least as precise.  
Of course it’s not – if it were, everyone would make a fortune. The difference, of course, is significant. Investing is not a science; it’s a combination of science and art. Investing is more economics than physics, and economics is as much art as it is science because there is so much human behaviour in economics. Instruments of economics are never totally predictable – because human behaviour isn’t predictable.

The data is not always helpful
We have access to more information these days than ever but that doesn’t mean that we either understand it or can make sense of it. Sometimes, too much information is the same as no information.

Financial engineers are analysing the data extensively and ‘discovering’ risk factors that go a long way to explain returns. We are definitely more educated around how markets work and the relationship between various factors, but the data can also be manipulated to draw biased conclusions. As the saying goes: “If the data is interrogated hard enough, it will tell you what you want to know.

“A wealth of information creates a poverty of attention”
Even though we have internet search engines like Google, it’s still a struggle to find what you want.

Investment markets are based on the fundamental premise that the market participants care about the price. The ‘Efficient Market Hypothesis’ then argues that markets are considered ‘efficient’ if all available information is ‘in the price’. In other words, all market participants have access to all available information about the security, and they have considered it before determining their view of the price.
I wonder whether for the first time in history, a significant portion of market participants don’t care about the price. There is an unprecedented flow of funds into index funds and neither the investor nor the manager of index funds pays any attention to the price of the securities within the fund.

Intelligence and rationality aren’t necessarily linked…

Sir Isaac Newton, an English mathematician, astronomer, theologian, author and physicist not only identified an investment bubble after making money out of it, but managed to get out of it early enough to secure his profit.

However, after the price kept rising irrationally, he couldn’t help himself and got back in at three times what he had originally paid, only to lose it all and go bankrupt. He summed up his experience with, “I can calculate the movement of stars, but not the madness of men.


First, avoid bad decisions

Investing is not only about making money – it’s also about avoiding losing money.