Challenge to Judgment

Open Mind - Einstein.jpg

In 1974, Paul Samuelson writes an article in the Journal of Portfolio Management titled “Challenge to Judgement.” The article questioned the concept of active management and hinted at the origin of the first index fund. The article is a short read but can be summed up with a quick quote from Paul:

“At the least, some large foundation should set up an in-house portfolio that tracks the S&P 500 Index – if only for the purpose of setting up a naive model against which their in-house gunslingers can measure their prowess.”

Jack Bogle, at the time, was the lead manager at the Wellington Fund. While reading this article, Jack decided the idea was solid and should be advanced. What developed from this article is today a firm called Vanguard, managing over 5 trillion in assets globally!


Recently, I listened to a podcast between AQR co-founder Cliff Asness and Vanguard’s Jack Bogle. Pairing up a titan of active management against the father of passive investing. You would expect to hear bickering back and forth debating who has the best investment strategy for all of mankind. Instead, what we see is a lot of agreement between both Cliff and Jack.

Let’s start with the invention of the index fund. Most people assume index funds were created based upon the theory of the Efficient Market Hypothesis. In a nutshell, EMH assumes markets are efficient and all information is known, therefore earning excess returns above a benchmark is impossible. To put this another way, if the S&P 500 is your benchmark, EMH assumes no managers can beat this benchmark because all information is already priced into a security.

Bogle’s response to creating the index fund actually had nothing to do with the Efficient Market Hypothesis but instead something much simpler. Index funds, per Bogle, were created simply to alleviate the need for cost within a portfolio. Some managers are going to try to outperform the benchmark and will succeed in doing so. While other managers will attempt this same outperformance, only to fail. For every outperforming fund within an industry, there is a corresponding underperforming fund. So why pay for the chance to outperform when you can simply accept the average return for virtually nothing.

Charging more cannot beat an average that’s charging less. – Cliff Asness


Imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you’d end up with about $430,000.

If, on the other hand, you paid 2% a year in costs, after 25 years you’d only have about $260,000.

A bar chart showing that 2% costs can eat away at money you've saved

Source: Vanguard – Cost’s Eat Away Your Returns

So when evaluating index funds, your expectations need to be set to match exactly what they are intended to do. Your goal when purchasing an index fund is simply receiving an average return of the markets returns over time. Price discovery (aka Active Management) will still exist, and some fund will actually outperform these index every year. The thing we have to focus on is that it probably will not be the same manager outperforming each and every year.

Cliff Asness actually believes we could see the amount of indexing double or even triple as a percentage of the entire stock market. This doesn’t mean active management is going away, but instead, it’s becoming more competitive.

In the past, it was everyone in one giant ring fighting against each other for the best investment returns. Your grandparents invested against every hedge fund manager, portfolio manager, endowment, and pension for their returns.

In the future, however, it may end up being a large portion of the world’s assets indexed to receive the average return. The remaining 15-20% of assets might remain a hyper-competitive active management showdown. Your children, on the other hand, may simply accept average returns. Leaving hedge fund managers, portfolio managers, endowments, and pensions to fight amongst themselves for returns!

Please ignore typo’s, I will be editing grammar as I go!
Sources: Vanguard, AQR
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Over-Excitement

Crichton - Hype

May 21st, 1980

Star Wars – The Empire Strikes Back releases

Overnight, Boba Fett becomes an instant fan favorite

Image result for boba fett empire strikes back

Source: Disney

So how does a character with virtually no screen time create such hype, excitement, and allure among the Star Wars Fans?

First, some interesting stats about the movie from the Boba Fett Fan Club:

  • Boba Fett’s 4 lines consist of 5 sentences total.
  • Boba Fett’s lines total 27 words.
  • Boba Fett’s screen time is 6 minutes 32 seconds
  • Boba Fett has only one scene over 1 minute long.
  • The second longest scene is 47 seconds long.

I have had a long-running suspicion that his popularity stems from having a jet-pack in 1980. Fans seeing this technology at the time were enamored with this ability to fly that drove his popularity through the roof. There could be a multitude of reasons for his popularity but we can leave that debate for the fan club.


Just as fans gravitate towards popular movie characters, people seem to gravitate towards great storytellers when it comes to investing ideas.

Take, for example, Elizabeth Holmes and Theranos. Investors hyped Theranos as a breakthrough in the blood-testing market. Theranos claimed its technology was revolutionary and that its tests required only about 1/100 to 1/1,000 of the amount of blood that would ordinarily be needed and cost far less than existing tests. Immediately the story of “The Next Steve Jobs” beings to travel throughout Silicon Valley and the rest of Wall Street. In 2014, Theranos was valued at $10B!

Theranos-Secures-100-Million-in-Debt-Financing.jpg

Fast forward to 2018, the SEC charges Theranos, Holmes, and other management with fraud. The company craters, Holmes is barred from the industry, and investors lose pretty much everything. In John Carreyrou’s book, Bad Blood, details of how much fraud was going on inside the company are astounding. More of a show was going to sell investors than actual research to revolutionize the blood-testing industry.


What investors seem to get caught up with is trying to chase after some new technology before it is perfected. We get over-excited at the onset of some new innovative idea that we forget to actually determine whether or not it’s a viable product. The concept here is what’s known as the hype cycle.

researchmethodology-illustration-hype-cycle.jpg

Source: Gartner

There are 5 parts to this hype cycle that we have to be aware of when evaluating some new innovative idea. The sections below are all from Gartner’s website that details how Hype Cycles work.

  1. Innovation Trigger: A potential technology breakthrough kicks things off. Early proof-of-concept stories and media interest trigger significant publicity. Often no usable products exist and commercial viability is unproven.
  2. Peak of Inflated Expectations: Early publicity produces a number of success stories — often accompanied by scores of failures. Some companies take action; many do not.
  3. Trough of Disillusionment: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investments continue only if the surviving providers improve their products to the satisfaction of early adopters.
  4. Slope of Enlightenment: More instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. Second- and third-generation products appear from technology providers. More enterprises fund pilots; conservative companies remain cautious.
  5. Plateau of Productivity: Mainstream adoption starts to take off. Criteria for assessing provider viability are more clearly defined. The technology’s broad market applicability and relevance are clearly paying off.

Our goal as investors it to evaluate where on the hype cycle we are before we make some investment decision. Theranos might have been the first mover trying to disrupt the blood-testing market but we see in hindsight we are still years, maybe decades away.

Your positioning on the hype cycle also has a significant impact on your future returns. Palm was one of the first movers in the smartphone industry that did nothing but ruin wealth for its investors.

Palm (PALM) stock chart

From a value of almost $50B in the early 2000’s to being acquired by HP in 2010 for $1.2B. The Palm brand was acquired, disassembled, and retired.


Our goal should be to figure out where on the hype cycle we are when looking at new investments. Wealth is created for the masses once a mainstream adoption is underway. Internet stocks boomed in 1998 and crashed in 2000. Out of this collapse came some of the greatest wealth creators of our generation (Google, Facebook, Amazon Web Services).

This makes me think of the quote from Moneyball, “The first guy through the wall, he always gets bloody.” You don’t need to be the first to adopt some new innovative concept. Instead, let it germinate, grow, develop, and become stable.

Wealth is accumulated in years not minutes. So focus your attention on the long-game and the companies best positioned to be there. Optimism and hype lead to over-excitement and overvalued investment opportunities. Once the hype is gone and the technology is perfected, the accumulation of wealth is not far behind. Stay patient.

Please ignore typo’s, I will be editing grammar as I go!
Sources: Disney, Wikipedia, Yahoo Finance
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

The Downside of the Internet

Info Overload - Shirky

With the advent of the internet, the availability of almost anything you can think of is only seconds away. Whether it’s a recipe, directions, homes for sale, or a digital copy of the encyclopedia, you can pretty much find anything you’re looking for in a matter of seconds.

Social media, being part of this internet revolution, has been one of the most amazing components of this revolution. In one application, you are able to keep in touch with a massive network of friends, family, and co-workers like never before.

In what seems like an eternity ago, you once had to actually pick up the phone and schedule a time to meet. Now you can creep on someone’s social media feed and monitor their lives in real-time.

Why actually call someone when you can just check their Instagram and Facebook for all the questions you have?


The past few months I have been working hard to cut back my social media usage. As part of this process, I have deleted all social media apps (except Twitter), and access my profiles through the web. The more I tracked what I am spending my time following, the more I realize I am killing brain cells and wasting valuable time.

Along with the useless photos, videos, and news articles I’ve consumed, The Four work tirelessly to ensure we are fed sufficient advertisements to further steal your time.  Among “The Four”, it’s Facebook and Google that spend the most time attacking the rest of your spare time.

I would wager that Google and Facebook know more about you than your family does.

The 4 - Scott Galloway

With this detailed knowledge about your desires, wants, and dreams, they bombard you with wave after wave of products and services to hopefully convince you to make a purchase.

Now I could care less about the type of jeans Facebook convinces you to buy, I am instead concerned about the media, content, articles, and news outlets they think are relevant to you.

With this deep understanding of how your brain works, Google and Facebook send you an endless barrage of other (similar) content sources for you to consume. The overwhelming rush of media and news leads to an issue we have to keep an eye on.

This issue is what we call confirmation bias.

confirmation-bias (1)


Confirmation bias is essentially spending all of your time and energy only consuming content that agrees with your existing beliefs.

Confirmation-Bias.png

Source: Farnam Street

If we use the economy as an example, this can be seen quite easily.

Let’s assume you are concerned about an economic recession. A quick trip to Google or Facebook will land you right in the middle of a dozen writers concerned with the same thing.

Literally, searching the words “economic recession” in either of these platforms brings about the end of the world.

It’s scary but you can search just about anything and make it become true. Try searching your symptoms when your sick, or something about your political views, the platforms then fuel your confirmation bias to the point of no return.


My point with this article is simple and I’m going to repost the quote at the very top.

Info Overload - Shirky

Facebook, Google, and almost all media sources out there are simply yes men, aiming to agree with whatever the hell you want to think about that day. Your price for this agreement is that hopefully, you buy something from whoever bought the ad.

None of these platforms are in the business of economics, asset management, financial planning, or retirement. These media companies are paid on advertising dollars, so whoever pays the highest amount gets to determine what is seen the most. It is up to you to take the time to understand where your content is coming from and if it really affects your financial and investing decisions.


Nobody is going to control the amount of garbage floating around the web. Instead, we have to construct strong filters for rejecting bad content. Our goal is to make the best, unbiased, decisions we possibly can. So spend as much time as you can evaluating all of the facts, not just the ones that agree with you.

Please ignore typo’s, I will be editing grammar as I go!
Sources: Farnam Street, Scott Galloway, Google, Facebook
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Luck or Serendipity

Munger - Career Advice.jpg

When you think about the future, where do you see yourself?

For some, it’s retiring in a place you love and enjoy. While for others, it’s building a wonderful business and career that is both challenging and rewarding.

But when we think of these goals we set for ourselves, how do we actually get there? And when we see people ahead of us in life, how did they get there?

It Must Have Been Luck


I was listening to an old interview with Jason Zweig of the Wall Street Journal as he went into a long discussion on what younger investors should be doing with their time. His advice was to avoid spending a ton of time trying to trade financial markets and reduce time spent on social media sites for fear of massive waves of confirmation bias.

Instead of spending tons of time trying to outsmart the rest of the world, Jason’s recommendation was to put yourself into a position where good things can happen for yourself and your career. If you are able to change up your daily routines and network with new people, you increase your chances for success.

To further explain this, Jason uses the concepts of luck vs. serendipity. With luck, you are hoping something will happen by chance. With serendipity, you are actively putting yourself into situations to make something happen.


How I built this with Guy Raz

Source: NPR

This concept made me think of the amazing podcast How I Built This on NPR. Each week, a business owner is interviewed to understand exactly how they got from an idea to a wildly successful enterprise. These entrepreneurs literally kill themselves trying to solve a problem or create a brand. With countless years of dedication, eventually, the reward was found.

You can take the luck/serendipity example from Zweig and apply it to any of these entrepreneurs. Were they completely lucky in building out their empires? Or, were they so diligently working to build their business, it eventually worked? (serendipity)


So think about the goals you have in front of you right now. How are you going achieve them? What can you be doing besides hoping they will come true?

An interesting survey from TD Ameritrade shows some terrifying statistics that I hope for our entire population are untrue (1500 millennials surveyed):

  • 53% of millennials expect to be millionaires
  • The average age to start saving for retirement was 36
  • The average age to start retirement was 56

So to summarize, millennials want to work for 20 years, save at age 36 and have a million dollars or more in the bank by 56. This survey shows that Millennials have a high emphasis on catching a “lucky break”  and a lot less focus on reality.

With a few adjustments in Vanguard’s Retirement Income Calculator, you can see how far off these figures actually are. For an individual making $100k/yr, they would barely have enough saved to live off $2k/mo at age 56, even if they saved 30% of their earnings every year!

Capture.PNG

Source: Vanguard

Begin by starting to make REALISTIC goals for the future and some ACTIONABLE steps for attaining those goals. Sitting around and expecting something to happen is a fool’s errand. Instead of chasing the lucky option, look for the most serendipitous option.

For Your Career: Have you invested enough time into your biggest asset (YOURSELF) to get the job of your dreams? Or could you be doing something more with your time to better yourself and your job prospects?

Paying Down Debt: Are you actually making a budget to pay down your debts or are you just hoping it disappears? (debt grows, so pay it off)

Planning Retirement: Are you spending enough time actually planning out the road ahead? Or did you arbitrarily choose some magic age to quit work?

In the end, there are two ways to look at it.

  1. You luckily completed your goals
  2. You put yourself into every possible position to achieve your goals (serendipity).
Please ignore typo’s, I will be editing grammar as I go!
Sources: NPR, Jason Zweig
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

Is Investing Really Gambling?

Cardano - Gambling.jpg

What do you see when you look at your investment portfolio?

To some investors, it seems like small bets scattered across many stocks.

But what really are we doing when we buy investments?

Source: Stash

Let’s begin with what you are actually buying; Assets and Cash Flows.

With gambling, your dollars are handed over to some dealer or slot-machine and you are returned with chances. These are basically opportunities for you to get some return on your capital. Your returns depend on the game you play, and in certain games, the opponents you play against. You do not own any assets, just a chance to win something.

With investing, your dollars are handed over to either an investment manager or the owner of another company. An investment in an individual stock actually provides you a small ownership stake in the underlying business.

Take Disney for example, if you had purchased stock from the company, you would be provided a certificate (see below) that proved you owned a percentage of the firm. This stock will increase (decrease) in value as the business of Disney grows (falls).

Disney-Stock-Certific_Edit.jpg

Source: ILBN

With investing, our goal is to grow wealth over time. With gambling, our focus is to make a few quick bets and hope we make the right decision. Ask yourself, where are you focusing your attention? Wealth building or quick wins?


Next, let’s look at the odds.

There’s a famous quote that pretty much explains gambling and your odds of success. Everyone has heard it as it has been repeated for decades.

The House Always Wins

So, if we know the house is going to win, why do we partake? Shouldn’t our focus be to deploy our money in the best places to successfully earn a return? If we look at some data from Oppenheimer, we can see some major differences between gambling and investing in the stock market.

Gambling - Oppenheimer

Source: Oppenheimer

The average casino game runs at about a 40-45% chance of winning. That means with every bet you make, you have a larger chance to lose than you have to win. Yet every year, millions of Americans board a plane to go lose all their money in Vegas.

If we look at investing, the big key is that time is your biggest asset! By looking at over 90 years of stock market returns, we find a 75% chance of positive US Stock market returns over one-year rolling periods. And over 15 year periods, that return chance is over 99%

Ironically, the longer you sit at a table in Vegas the worse your odds get.

Yet, the longer you can invest in the stock market, the better your odds get.


As investors, we need to establish a plan for how we might invest, and then work as hard as we can to maintain it. Allowing time and compound interest to do their work will drastically improve the outcome of your investing.

Take Warren Buffet, for example, sure he made significant money in his 30’s and 40’s, but the bulk of his net worth was the product of extensive time and compounding. If we can all aspire to set a long-term focus on some portion of our investments, we will reap the reward of compounding our wealth!

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Please ignore typo’s, I will be editing grammar as I go!
Sources: Stash InvestOppenheimer, LIBN, MarketWatch
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.