Every year in this business is a time for learning and development. That’s the best part of being involved in the financial markets. They are so dynamic that you never quite “solve the puzzle” because the puzzle is always getting reshuffled in front of you right when you think you’ve got it solved. Here are some of the lessons I learned this year:
1. You know less than you think you know. There is a nearly insurmountable amount of material to learn about in the fields of finance and economics. They span the fields of math, accounting, psychology and many others. You could spend an entire lifetime on ONE of those and never quite figure it out. So it’s not surprising that finance people tend to focus on finance and economists focus on economics. It’s only stupid people like me who try to traverse both fields. But the big lesson is that I always have to remind myself that I know so much less than I think I know. This business will humble you if you don’t check your ego at the door. Always be learning.
2. Capitalism works best when capitalists serve others. It’s become fashionable since the financial crisis to demonize and blame capitalism. As if this system is inherently evil or bad for society. But the system is only as bad as we allow it to be. Any system filled with corrupt and evil people will become a harmful system. Capitalism is not an inherently evil system in and of itself. But I do wonder if sometimes we take capitalism to mean the pursuit of self interest and the pursuit of personal profit when, the reality is that capitalism is not at all about personal profit and the pursuit of self interest. In fact, capitalism is really about making goods and services that enhance the lives of other people and expecting to profit in the process. That’s a big difference. We are not in a system where it’s “every man for himself”. We are not rugged individualists. We are inherently social animals working together to achieve things together. I was educated in a Jesuit education system my entire life and the Jesuit motto is “men for others”. Capitalism would benefit greatly if more capitalists took that motto to heart.
3. The person who mistakes “money” for “wealth” will live a life accumulating things, all the while mistaking a life of owning for a life of living. This was one of the first years in my life when I really embraced the idea of living and not accumulating. It’s easy to fall into the trap of thinking that more money and more material goods will necessarily make you happy. And while it’s true that a certain amount of money will certainly make life easier, I find that more money and more material goods also bring more problems. I am happiest when I focus my time and energy on things that really matter to me like the people I love. It’s all about finding a balance for me. Money will make your life easier to a certain degree, but if you let money own you it will make you miserable. I became a lot happier when I realized that money isn’t true wealth.
I am opening the comments on this one. Let me know what you learned this year. And here’s to hoping that we learn a lot together in 2015.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Great post. Great year Cullen. Thanks for passing on everything you learn so that the rest of us can learn with you.
Good post. Difficult question. I think I’m with your first point: realized this year I know less than I thought 🙂
All-pole vector autoregressive (VAR) spectral estimation, the so-called ‘financial’ cycle in the BIS’s annual report for 2014 (cf. Noah Smith’s recent column on Bloomberg about the business cycle), Partially Observable Markov Decision Processes, and the lyrics to Grace Slick’s song “Hey Fredrick” of Jefferson Airplanes’ album “Volunteers”.
I don’t get out much…
Good luck for the next year.
English. We speak english here!
I agree with #2 but it’s not based in reality. It’s a pie in the sky description of capitalism and doesn’t match the American reality where everything is very clearly “Every man for himself.” I would suggest that that mindset is the hidden fuel behind the recent protests. Not that the protesters are predominantly out for themselves but they have an underlying belief (fear?) that those in power are ONLY out for themselves.
I believe we’ll be talking more and more about this distinction over the next decade.
I learned that “Peak Oil” did’nt peak yet like we were lead to believe.
#2 is just gobbley gook. What Sayet calls the modern liberal utopia.if I didn’t know better i would say it was written by an adolescent. I love the verse in the Bible that says ” don’t worry about the sty in someone elses eye, but worry about the LOG in your eye”. Let’s look at some of what you said in #2 with this verse in mind.
1)We are not in a system where it’s “every man for himself.
Well Cullen are you a totally giving man, not worried about you and your families welfare first, but that of others. Do you put others before your family?
2)We are inherently social animals working together to achieve things together
Well Cullen are you always working for the other man, never putting self- your families welfare,or your companies survival first?
If you stop pontificating to others and just ask yourself if you are doing the proper things , you ( actually all of us) will come up short.
So grow up, remember your Christian upbringing and always remember that verse.
1) It’s not about being a “totally giving man” (whatever that means). It’s about understanding the fact that capitalism is actually a system that works best when the capitalists take care of their customers before they take care of themselves. This isn’t a “liberal” idea. It’s just a good business model and one that I take to heart.
2) Well, yes. I have clients who I work hard to take good care of. And I often sacrifice my personal well-being for their well-being. That’s what a good business owner does at times.
You’ve tried to take what should be good business practices and flip them into some sort of political rant. And leave all the personal stuff out of the comments next time. I got rid of comments because of people like you who can’t seem to comment on the internet without making everything some personal political crusade….Sheesh. Lighten up.
Not so fast young man. You are the one who used the word “evil” in your original post, that’s pretty heavy and introduces morality. Also you were the one who got personal first by bringing up your Jesuit education.
When you say “That’s what a good business owner does…” What is your definition of the word good? If it is good from a dollar and cents point of view, then that is an old concept(e.g. the customer is always right, our customers come first, etc).But if it is used in a moral sense then you are the one who is on a moral crusade.
1) I said the system wasn’t inherently evil. Why are you insulted by something I said wasn’t the case?
2) I have a fiduciary responsibility to do what’s in the best interest of my clients as opposed to just doing what’s in the best interest of my firm. “Good” in the financial services industry is pretty cut and dry when it comes to this standard.
I didn’t say anyone was “evil”. I didn’t imply that you were a bad person. I simply said that capitalism works best when capitalists look out for the interests of other people. I have no idea why that is an offensive concept or even a controversial one. Do you reject the idea that we can earn a profit AND look out for the best interests of other people?
Why are you getting so defensive over a totally innocuous comment?
Dr Aniruddha Malpani, MD
# 3 is a very mature observation – thanks for sharing !
You are correct, #2 was a completely innocuous and that’s why i called it gobbley gook.
As to your statement
“earn a profit AND look out for the best interests of other people”
it shows your silliness. Of course a win-win situation is preferable, even a child knows that. That is precisely why i referenced the utopian concept.
But alas life is not so simple.
Stick to stock picking and leave the moralizing to a greater authority.
Well anyway have a Merry Christmas and a Happy New Year
I learned that after 5+ years of reading economics blogs that economists just can’t narrow the discussion on the theory of prices or moneyness or … . It’s permanent Balkanization.
I think the word you’re looking for is gobbledygook. You sound a little silly when you use a word incorrectly in consecutive comments. 🙂
The economy is actually made up of what people think are mostly win-win transactions. You buy goods and services in exchange for money because it’s a fair trade in your mind. But there are entities and people who can take advantage of this arrangement and do things that unnecessarily sway the balance in favor of capitalists usually in the name of greed (though masked as “maximizing shareholder value” or something like that). They can manipulate prices, wages, etc. Human beings are unique in that we take so much more than we need and often do so at the severe detriment to others. It need not be this way even in a capitalist system. This doesn’t mean that capitalists don’t earn their profits or deserve their profits. But capitalists can be more mindful of their ability to help others in the process of helping themselves. Again, I don’t think this is a “silly” point. Morally and monetarily, I think it’s a hugely important point. In fact, I suppose that capitalists who take this to heart can actually compete on higher ground than their competitors who engage in a “take all” sort of business practice.
A great example is my business model. I charge 0.35% for asset management. That’s 0.65% lower than the average in the industry. So, I specifically reduce my own potential profit, but in doing so I am able to generate a better product for my clients because they keep more of their returns. My business model and lifestyle doesn’t require that I make gross amounts of money so I am perfectly happy taking less knowing that my clients can keep more. It’s a win win. And my competitors hate my guts for it because I am taking market share from them. So yes, we can do what’s right for our clients AND earn a profit so long as you understand that sometimes doing the right thing means earning less profit in exchange for a better overall product.
I just finished reading the book “Enough” by John Bogle. You might want to read it over the holidays. It will help you understand where I am coming from. Take care.
Thanks for the spelling correction.
I would recommend you read “Never Enough” by William Voegeli.
I think Ican best illustrate my position by taking your:
Human beings are unique in that we take so much more than we need and often do so at the severe detriment to others
And changing to :
I (Cullen and Amoose) am unique in that i take so much more than i need and often do so at the severe detriment to others.
But capitalists can be more mindful of their ability to help others in the process of helping themselves.
and changing it to:
But I (Cullen and Amoose) can be more mindful to help others in the process of helping themselves.
Now grade YOURSELF on how well you are doing. I didn’t get a good grade, How about you?
You see it has nothing to with capitalism, but it is about you and me trying to follow the teachings of our Lord.
I am very familiar with Bogle’s views, He is a Christian and that’s where he gets his value system from.
Sorry Cullen all my money is with Vanguard, I have been a Boglehead for many, many years.:-)
Again Merry Christmas and Happy New Year to all.
Voegli is just another pundit who thinks the USA is bankrupt and that a solvency crisis and high inflation are right around the corner. In other words, all the same stuff we’ve been hearing about for 10 years that hasn’t happened and won’t happen any time soon. It’s politics masquerading as economics. His understanding of the monetary system is not exactly right.
It doesn’t surprise me that you’re a Boglehead. Many of the Bogleheads believe that the market is some all knowing entity and that discretionary portfolio intervention of any type is silly. Of course, as I’ve described in my recent series on the myth of passive investing, all Bogleheads engage in discretionary portfolio intervention by deviating from global cap weighting, factor tilting, rebalancing, etc. Bogleheads are active asset pickers who call their form of active management something else. It’s really just a clever form of branding that some firms sold to people under the disguise of “passive investing”. It’s just brand differentiation. It’s not actually “passive” or all that different from many forms of “active” asset allocation strategies.
Bogelheads are discretionary interventionists who (often) think the market is some “efficient” mechanism, but don’t understand that the entire “passive” framework is a huge contradiction. You’re actually an advocate of discretionary active portfolio management and if your politics were consistent with your portfolio management style you’d also believe in the type of govt intervention you’ve spent so much time railing against here.
Just wanted to convey my thanks – you have enriched the knowledge and portfolios of countless others like me!
Wishing you Happy Holidays and a “wealthy” 2015 🙂
I live in Saint Louis just south of Ferguson. By watching and reflecting on the tragic events that have occurred over the last several months, I learned that taking responsibility for your own actions and empathy for the actions or reactions of others is paramount. I also was reminded that all too often people are judged by what group they come from rather than who they are as individuals. I have begun noticing more when I am acting on autopilot rather than really slowing down and being present. I tend to judge people more when cruising on autopilot.
Re #2 — I used to give a lecture to new employees. One message — “Business” is about all the stakeholders. Without value to customers, the business dies. Do that right, along with fairness to employees and suppliers, well enough to provide return to owners, and that’s a successful businees. Trying to make money without value to customers and fairness to others is just a fraud scheme.
Re other comments on this subject — didn’t know Ayn Rand read and responded to your blog!
In the conducting of business, I make an effort to see that everyone involved gets a fair shake. Or I’ll toss a few dollars back in flowers or a coupla beers. Occasionally I get questioned. If they can’t accept altruism as my motive, I speak of greasing the machine: It won’t work well if you don’t maintain all the individual parts. If they aren’t comfortable with altruism or selfishness, I figure they just want to argue. And I move on. Maybe I’ll see you in Coronado again. If so, it’d be an honor to buy you a beer. May 2015 surprise you with it’s excellentitiousness.
I have a feeling #3 is incomprehensible to people who are still struggling to accumulate some wealth, let alone a meaningful amount of wealth. For some people whose family live in an environment of bad schools, dangerous surroundings, or just general misery, the idea of accumulating wealth to escape that environ may be the most important thing.
“Money can’t buy you happiness” tends to be spoken by those who already have money. For those who don’t, they sure want to be able to be in a position and have the luxury to also spout phrases like, “Money can’t buy you happiness.”
What I have discovered is that Money can solve a hell of a lot of problems. Sure it brought with it its own set of problems, but given a choice, I’d still rather have the Problems of Having Money, rather than Money Problems.
My big thing learned for the year…
You can be insanely aggressive and get away with it… as long as you
are insanely aggressive with a small enough portion of your investment
capital to withstand it breaking the wrong way. If the investment has a
good enough thesis to allow you to make a rational decision about
whether to take the loss and go elsewhere or ride it out because it is
an extended timetable rather than a fundamental issue, that’s even
better. Successful long term craziness in one arena is best supported
by cold hard eyed practicality in another (Small biotech start ups and a
conservative diversified income and gains producing portfolio).
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