I want to discuss with you a phenomenon that has applications in the investing world and beyond: anchoring. Simply put, anchoring occurs when someone tells you a fact or opinion, and then you use that information to make a series of decisions thereafter (that are based on that first bit of information).
If someone performs their own analysis and concludes that Berkshire Hathaway is worth $150 per share, the fact that the price is $115 per share at the time they perform their analysis will affect their subsequent decisions. If, say, the stock goes up to $145, they may be reluctant to buy (even though it is still $5 less than their estimate of value) simply because the twenty percent rise in the price of the stock somehow indicated that it is now expensive.
You see it all the time with people who conclude “that stock is at a 52 … Read the rest of this article!
I’m showing you this video not for the editorial content—one of the deep flaws in arguments about wealth is that, when someone is making $1,000,000 compared to someone making $50,000, the rhetorical question “Does that person really work 20x as hard as the other?” usually follows. The problem with that question is that it equates effort with value.
Imagine someone owns 3.65 million shares, or about 1%, of the Kellogg’s corporation. Because of what he owns, he is delivering $18 million in profitable value to people across the world each year because those people are choosing to take their scarce dollars (which they acquired through work, investing, inheritance, etc.) and buy Rice Krisipies, Frosted Flakes, Fruit Loops, Pop-Tarts, Eggo-Waffles, and so on. A little less than half of that $18 million will show up in the form of $8-$9 million worth of dividend checks that are paid out every ninety … Read the rest of this article!
There was a write about a half-century ago named John O’Hara. He was a cranky guy with a wide variety of interests, and although he had a large number of critics, he was good enough to persuade fellow writer Fran Lebowitz to dub him “the real F. Scott Fitzgerald.”
One of his caricatures that he liked to create in his writings were hypothetical dialogues between characters that represent “Old Money” interacting with young men that were on a quest to get rich in a hurry. It would be hard for a writer like O’Hara to become generally mainstream today, because O’Hara relied on a mixture of strong moral condemnation mixed with relentless stereotyping, and that would create a strong mismatch with the rising sensitivities and general tendency to take abstract insults personally that generally typifies the current socio-political climate.
Why, then, do I bring O’Hara up? Because one of his … Read the rest of this article!
Retirement planning is one of those tricky subjects that leads to millions of finance articles and $1,000 seminars dedicated to talking about (preying upon?) the insecurities of individuals as they enter an age in which they can’t rely on their labor anymore and must rely on a combination of Social Security, pensions, and ownership interests to get the pills paid.
To be honest, the real formula for retirement is this: “You can safely retire once you can safely generate 125% of the amount of money that you project you will spend in a given year.” The extra 25% difference accounts for unexpected expenses that show up and give you a nice margin of safety to reinvest dividends or whatever it may be so that you can make sure that you spend your later years skating on the thick part of the ice (after all, once you enter thin ice territory, … Read the rest of this article!
One thing I have strong mixed emotions about is my terrible track record of responding to reader e-mails. At my current rate, I’m only responding back to about one out of every fifteen or so that spend some of their precious time to contact me. It is the way it is because I made the value judgment that I’d rather spend most of my days acting—that is, setting out specific things I want to accomplish and then putting in the work to make them happen—rather than reacting, which you can easily found yourself doing if you interact on Facebook, e-mail, and Twitter for good chunks of time. The reason I feel bad, though, is because I should respect the time of anyone who spent time crafting a chat with me, because I’m grateful for the generosity of others who did it for me, and well, it’s the right thing … Read the rest of this article!