Lessons from 2009: Part 1

Posted by on December 16, 2009 in Misc.

2009 was truly an extremely strange and trying year. As someone self-employed, income tends to fluctuate at the best of times. Insert global credit crisis and a larger crisis of collective confidence in the future and you have an environment which, to state the obvious, is difficult for anyone to make a buck. Having said that, failure and adversity are the best of life teachers and success, paradoxically, a very poor one.

As my second last post of the year, I wanted to share a few things lessons learned from 2009.

Personal Finance is a process and not an outcome.

If you are a long time reader of my blog, you will notice that I have ceased really to review individual stocks or companies. This decision is conscious on my part since: (i) many other bloggers do it so well; and (ii) after 500 posts, I see personal finance as a process and not an outcome.

What do I mean by this? An outcome is product. An outcome is a ROI calculation. An outcome, devoid a thorough and analytical process, is often a search for the magic bullet solution.

Seeking outcome means you ask the question: “what should I buy to return me 10% per year?”- a product allocation question- not “how do I need to arrange my personal finances to protect against downside risk and make a moderate amount of money”- a strategic question which only answers the question “what product” at the end of the process and not the beginning.

To frame this distinction another way, think of the tried and true maxims of investing: buy low, sell high, buy companies with economic moats, buy what you understand. These are questions of process and not of outcome. We tend to focus more on what Warren Buffett is buying rather than the thought process behind it.  One would do better not tracking what Buffett is buying but how he arrived at his decisions.

I will give you a recent example of a process versus outcome analysis. I have, as have many of you, been to enough investment seminars where the speaker announces that our government’s fiscal policies (or lack thereof), demographic trends and depleting resources will result in a dark future ahead. What ceases to amaze me is that often the first or second question asked by the audience is “What should I buy?”

That question speaks to outcome without the underlying process (and it also abdicates to a mere stranger one’s decision making). Assume that the economy will have a rough ride ahead. Take stock of your life and determine where you are at and the steps you want to take will result in some favorable outcome.

The process vs. outcome lesson really comes from spending time with some very successful people. When you have a difficult year, you attempt to seek answers from those you consider more successful than yourself. What I noticed when I asked or observed those who I respect is the rigorous process they went through before they actually came to an outcome.

The old saying of: “give a man a fish and he will eat for a day, teach him to fish and he will eat for a lifetime” is ultimately a process vs. outcome saying.

Use the media exceedingly carefully

The Tiger Woods story, in many respects, broke the final barrier between tabloid reporting and traditional journalism. When traditional media outlets engage in tabloid type report-its about speed and not accuracy, no one is fact checking, the story is constantly changing and, quite often, just plain wrong- you know the traditional media is now engaging in the business of screaming at the top of its lungs rather than reporting.

However, caught in a pincer movement between the internet and tabloid reporting, traditional media has probably played the “if you can’t beat them, join them” card. On the personal finance front, this has lead to the Jim Cramerization of the entire medium.

I was in Las Vegas earlier this year and turned on MSNBC. I thought I was watching football commentary. There were 4 panelists and a host just rapid firing information on the price movement of commodities, writing numbers on the screen and going all John Madden on the viewer (“price of gold goes- POW- up and look at the inflation numbers going down- THUMP! Let’s see that again in slow motion…”).  I changed the channel quickly. Personal finance is about your life which I hope is a long one. Life decisions should not be made based on jolts of information on tv.

There are many great columnists out there in personal finance but the medium itself is succumbing to the worst of excesses. Certainly, absorb the information but take everything you see or read with a grain of salt. Things will get worse. The media is fragmenting into specialty niches and the only way that the powers that be seem to know how to get our attention is to increasingly jump up and down and scream the loudest most often.

Avoid dogmatic approaches to personal finance

I blogged earlier this year about attending an investment seminar. What I did not mention was a gentleman in his late 50′s who insisted the only way to make money was through real estate and that the entire stock market was a ponzi scheme. He was willing to tell anyone this that listened.

I encountered this a lot this year. Some people think the stock market is the only way to make money and blame the crash on the bursting of the real estate bubble. Others insist that real estate is the only way to make money and cite the stock market crash as Exhibit A. Some entrepreneurs I know, looking at the masses of unemployed, declare building a business is the true path to financial independence.

I build businesses and I invest in stocks. The former was a real learning lesson for me since, in down times, your margin of error is small and you have to discipline yourself to be great and not just good. As a stock investor, I similarly learned from my investing mistakes (over allocation of financials in my dividend portfolio being the biggest one this year).

I do not believe because I did not experience the success I wanted to in these ventures that they are inherently “bad” approaches to personal finance. My speculation is that dogmatic thinking tends to come from people who experience success in a method and then think the method is the only way to go because of such success (again, success is a poor teacher).

I would suggest the opposite. If you have failed in a method (however one defines failure) but the method is fundamentally sound (have other people of the same age, skill and experience succeeded?), the lesson to be learned should not be the method is bad and give up but one has actually been given important knowledge on how to employ the method properly (knowing what not to do is sometimes more important than knowing what to do).

To answer the question of what is the best method achieving personal finance, I believe the right answer is to find something that works for you (whether real estate, stocks, businesses), learn it and perfect it. Use the mistakes as learning lessons and use those losses to improve on your skills. Most of all, use your energy to make yourself better at it rather than convince everybody else of the rightness of your thinking.

(part 2 tomorrow).

6 Comments on Lessons from 2009: Part 1

By 2 Cents on December 16, 2009 at 10:39 am

You make a ton of great points in this post. Balance, diversification, and caution will always be wise additions to any personal finance portfolio, but are especially important during times of upheaval. I’m not sure that’s completely over yet.

I also agree with you on media consumption. I have been trying to cut back on mine lately, as I find the constant arguing and talking over one another upsetting. More importantly, it provides no information whatsoever. Thanks for sharing your experience.

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