Speculation and Human Nature

Welcome in to another edition of Wisdom and Wealth. Please check out audio / podcast version of this newsletter via my Substack.

I was at the barbershop the other day. Normally my wife cuts my hair, but for some reason I went out this week. Typially, I get a fade that makes people wonder about whether I’m a cop or in the military on leave. Trust me, I’m a bit of a tight wad so when it comes time to get a nice haircut it’s about length of time it lasts! The reason I bring this up is that I’m a "people watcher" and eavesdropper. I love sitting at a bar or restaurant or airport and just hearing what people talk about. The barbershop is another place like that. On this particular day, I overheard my barber talking about getting ready to “ship out” and I asked him if that meant what I thought it did and was correct. He was headed out to the Navy later this year. He asked me what I did for a living and I told him.? His eyes lit up as he immediately asked me what I thought about cryptocurrency and meme coins. While I look young, to most people, the answer I gave him caused him to give me that look I once gave to someone back when I thought they were an “old fart” who was ruining my dreams. Yes, I tried to be polite and share with him my concerns etc. But I could tell, he was in turn being polite. We then talked about savings tools while in the military, how to get ahead on your college work while deployed and why the military is such a great institution. I told him thank you and that I was excited for him because he was about to embark on the best “professional blind date” I could ever imagine. May many more people go on such dates!

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This exchange got me thinking about how we view risk as a society. This gentleman cutting my hair was not a foolish person. His next steps were evidence of a level of professional seriousness that few possess. He was simply drawn towards the excitement of an investment no matter how unwise or ill-advised. To be clear, I’ve run across countless other people with both the life experience and common sense to know they shouldn’t be dabbling in speculation and yet their human nature has led them to gamble more than 30% of their net worth in speculative instruments whether it be their company stock, high flying tech stocks, or crypto. I’d say I’ve seen it all, but unfortunately, I haven’t, because the hits just keep on coming. Our Human Nature unfortunately possesses infinite ways to deceive us. The Josh Klooz Maxim to this is there is “no deception quite like self-deception because the triangle between your ears and heart is maximum security.”

So those who look at me funny when I say that most of investing starts with belief systems can hopefully now understand why I start at the foundational level. You have to start at the bottom and work your way to action. As I came away from this conversation, I was again reminded of the quote by Sir John Templeton that the “most terrifying words in the English language are: ‘this time it’s different’”. As a dad of four, I always thought they were “Daddy Watch this!” But rooted in the belief that “this time it is different” is the fundamental belief that there is a free lunch of sorts. That there is no risk of loss, only the risk of “missing out.” The risk of being left behind and not having what your neighbor has. We deceive ourselves that we can defy the laws of financial common sense and participate in something that will enrich us quickly. So, rather than “folding our money in half and putting it back in our pocket,” we double down on speculation and pay a price.

Now please hear me. I am a taker of risks. I am someone who has taken risks personally, with my family etc. But always, and forever has that risk come at a cost. I’m not telling you to not start or buy a business, invest in your family, change careers etc. I’m telling you those are all worthwhile and noble endeavors because you actually count the cost and are intimately more acquainted with the risks associated. Conversely, people tend to view risk for its own sake as a good thing when thinking about their portfolio. They are tempted to invest in a new technology, sector or innovation because they believe the upside is worth it. Furthermore we are tempted to think that the decisions we’ve made in the last two decades of the accumulation phase will serve us well in the “decumulation phase.” What we miss is that risk for its own sake is largely “hope of return” …and if Ranger School taught me anything, it taught me that: hope is not a strategy. Furthermore, if you are down to hoping something works out, it is another way of saying you failed to plan or perhaps put together a poor plan. Military operations, financial plans and investment portfolios have more in common than you think!

This is why in our foundational principles at the Bahnsen Group, we start with defining risk as “falling short of a goal” or not being able to pay for a need in the way you desire. When you view risk as market fluctuation or not having as much as your neighbor has, the conversation goes sideways quickly. If you have ever sat in a portfolio review with me, you will quickly realize that I’m running your plan in accordance with your expressed goals, not your idea of what your neighbors might be. I want you to be able to live life on your terms and invest in the things that are most meaningful to you with your cashflow. No matter how many times people express that they understand they cannot consistently outperform a certain index, I’m convinced they remain tempted to try. I remain convinced that this is rooted in our hope that there is a “free lunch” out there and that we can participate in it and not be harmed.

So, you may be reading this and asking what the difference is between high-risk investments and pure speculation. Is there a difference? I’m not sure I found a perfect answer to this question, but I’ll give you some thoughts below on what some of the hallmarks of speculation are. This is obviously not an exhaustive list, but my hope is that it will cover the high points.?

Speculation

·???????? Having more than 10% of your wealth in one company

·???????? Hoping that there is a market for a product or idea

·???????? Hoping government regulation will change so your investment can flourish

·???????? Buying an expensively valued investment and planning to sell it at a higher price

·???????? Betting that the next decade will be just like the last decade

·???????? Taking out debt against your investments

Taking Calculated Risk

·???????? Investing based upon balance sheet strength and return of cashflow

·???????? Investing in smaller companies with proven cashflows and patiently waiting for them to scale and grow

·???????? Committing to an investment for a decade

Hopefully the above has caused you to think more carefully about your own situation and also served as a type of inoculation against that temptation to outsmart your common sense. If you have questions or further thoughts please reach out at your earliest convenience and as always know that I’m wishing you continued Truth, Beauty and Goodness on the road ahead.

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