Contains the notes on the Retirement Planning study book material for the CFP Board Exam. It covers the numerous qualified and non-qualified retirement plan options and additional employee benefits.
B. H. Liddell Hart: Why We Fail to Learn from History
B.H. Lidell Hart spent a lifetime writing about the history of military strategy and war. He summarized the many lessons in his writings in a little book called Why Don’t We Learn from History?.
The book is meant as a summary of the history of warfare, but it’s much more than that. It’s easily translatable to lessons on life, business, and investing.
Only Hart presents it with an inverted view of the repeated mistakes throughout history deeply rooted in human nature.
The book is filled with a lot of lessons and great quotes. So I pulled a few favorites out and added my two cents, as it relates to investing, below each: Continue Reading…
Income Tax Planning Study Guide
Contains the notes on the Investment Planning study book material for the CFP Board Exam. It wades through the absurd complexity of the U.S. tax code as it relates to individuals and entities.
The Notes
Bernard Baruch’s Biggest Mistake
Bernard Baruch lived a dual financial life early in his career. He remained cautious and ever-watchful over his client’s money but that conservative nature ended where his own portfolio began.
Baruch tended to overtrade. He also ran a margin account and never left money in reserve. In other words, he liked to bet it all. But since he had little capital, he always put up the smallest margin possible.
In those days, margin accounts allowed anywhere from 10% to 20% margin. So Baruch could buy a stock using his own money to cover as little as 10% of a stock’s price and borrow the other 90%. Which is exactly what he did. Except, having no money in reserve meant a tiny change in price would quickly wipe him out. And so it went.
Anytime Baruch came across a stock or bond he felt sure of, he bet everything he had. Almost like clockwork, the market fluctuated in the wrong direction, and he was broke again. It didn’t help that most of his ideas came from gossip and tips. This process repeated numerous times before he finally realized he needed a little bit in reserve in case the market moved against him.
His big turning point, however, came in the spring of 1897. It was the first time Baruch changed his investment approach. He set his eyes on American Sugar Refining. He could afford to buy shares but before doing so he actually studied the company. Continue Reading…
Charlie Munger’s Tendencies of Human Misjudgment
Charlie Munger has spent a lifetime attempting to avoid stupid mistakes. He’s given a number of speeches on his experience over the years, that he ultimately compiled into one called: The Psychology of Human Misjudgment.
Munger noticed patterns of irrational behavior that led to repeated mistakes, so he set out to finds ways to understand psychology in order to avoid the mistakes himself:
I was greatly helped in my quest by two turns of mind. First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invert, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory? Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across.
Through inversion, stupidity, and bad judgment, he came up 25 tendencies we’re all susceptible to whether we know it or not. What follows is a brief breakdown of those tendencies (though, I recommend reading the entire speech). Continue Reading…
Wise Words on the Lessons of Market History
Market history is full of wonderful lessons. Not the surface-level lessons either.
The trouble is most people gravitate to the long-run data when first looking into market history. Except, that’s where they stop.
While yes, the data is useful — you learn how the different assets performed over the last century — but it’s just averages. And averages tend to smooth out bumpy rides. The interesting stuff is hidden in those bumpy rides.
One thing we learn is that markets are dynamic. It’s in a state of constant change.
Typically, those changes swing around the average, like a pendulum — moving away from it before reverting. On rare occasions, they don’t. Paradigm shifts.
One such paradigm shift happened in 1958. For decades, stock dividend yields always stayed above bond yields. The spread between the two would fluctuate, of course, but anytime the two yields came close they acted like two magnetics repelling each other.
As stock prices rose, dividend yields fell but never below bond yields. Anytime stock yields dipped close to bond yields, stock prices (or bond prices) would fall, and the spread between stock yields and bond yields would widen again. It was a pattern that investors relied on for its consistency. And it worked well…until it didn’t. Continue Reading…
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