Reframing, Luck, and Making the Most of What You Control

Jeff’s Random Words

On this week’s podcast, we had as our guest Peter Atwater, author of the new book The Confidence Map. In preparation for the interview, I read the book and took notes on what I wanted to ask him about. Jason planned to do the same, but the big words tripped him up.

Because the book wasn’t written necessarily for investors (although there are plenty of investing examples used in the book), my goal while reading was to try to frame the concepts in a way that would make sense for our audience. When you listen to the interview, and the discussion that follows, I think (hope) you’ll find how the questions were asked to be helpful.

As I think back on the interview, I keep coming back to something I said to Jason while we discussed the interview. I noticed while reading the book that much of what it is about is a reframing of timeless investing lessons. I don’t mean that pejoratively. I think reframing is super important to learning, and that’s what I want to write about.

Many of our listeners know that in my day job, I work in education. I was a music teacher for more than a decade before moving into administration. Before that, I was a college music major trying to learn to become a teacher as well as a professional musician. There was one particular skill I was working on for months and could not get right. It was driving me crazy. Then one day, a classmate explained it to me in a new way, he reframed it, and I could immediately do it. It was like a lightbulb went off. It was amazing.

Teachers learn very quickly how to reframe concepts. What makes sense to one student may not to another. Teaching is about knowing ten different ways to explain the same concept in hopes that one of those ways will work for all students.

Why am I talking about teaching? Because we’re all students in the lifelong classroom of investing (I kind of hate myself for writing that last sentence). Why do we do the wrong thing more than once? Because it hasn’t been reframed for us yet. It hasn’t “clicked”.

I sincerely hope you read Peter’s book. Not only because he is a super nice guy, but also because the lessons that are reframed for investors are important. I hope that Peter’s way of explaining things will “click” for you.

Jeff

Jason’s Random Words

I've spent a significant amount of the past 15 years picking individual stocks. I've gotten pretty good at it. Jeff, well, as the saying goes, those who can't, teach. I kid – he's a wonderful partner in this venture, and in his words below, his points about the power of reframing are spot-on. And I agree with his points about Peter's book. It really can help you make better decisions and potentially understand the decisions others are making too.

But I don't want to write more about Peter's book, or our conversation with him. We've already given you almost an hour of the podcast about it, plus Jeff's words.

There's a good chance that you found our newsletter and podcast because of our shared passion for stock picking. Stock picking is fun. It can be enormously profitable. It can also be stressful, money-losing, and life-changing in bad ways too. And after so many years, investing in stocks has played a big role in the wealth that my family has built.

But there are a few other things that have played a bigger role in our financial success than my stock-picking acumen. Here's one of the biggest: Since the beginning of 2009, the S&P 500 index, a great proxy for the U.S. stock market, has increased an average of 14% every year. That's a massive 40% in excess returns above the market's long-term average. Incredible.

Before you say, "Well, that's just cherry picking," it's deeply relevant to this conversation. While I did start investing in stocks in about 2006, it was in 2009 that I really got serious about it. I don't know if I can over-emphasize how much pure good luck has paid off for me. I have made some 95% of my capital contributions during this period of time.

What if I had started investing in 2000? The S&P 500 returned an average of 3.59% over the 13 years that followed. That's about one-third of the market's historical long-term average gains. Whew.

I have to acknowledge that, while I'm good at picking stocks, I've also been lucky.

Additionally, a huge portion of the wealth my family has built so far is a product of earnings. Pure and simple, having marketable skills that people will pay a lot for is more valuable than being a great stock picker. The rise of low-cost indexing and no trading fees makes it easier to put your skills to work earning, and then just let the market do the work of growing.

I've also been incredibly fortunate to have had the right mindset and some wonderful influences, not to mention a pretty big dose of laziness when it comes to investing. I don't sell very often. For example, I bought MercadoLibre in early 2015; a year later shares were down 26% but I didn't sell. Honestly, I don't remember anything about what was happening with it. Since then, shares are up more than 10-fold! I like to claim amazing skill, but I got lucky and picked a great company, and got lucky that I didn't get preoccupied with it and sell it; after all, it was trading for more than 9 times sales! An expensive loser!

Back to the point: A lot of good fortune – things that were outside of my control – have played a hand in my success. The bulk of my contributions happened when the market was generating some 40% in excess returns versus the market's long-term average. I made some pretty great stock picks. As much as I meddled, I didn't meddle too much. We have also focused a lot on what we can control, such as avoiding lifestyle creep, to make the most of our disposable income.

Maybe more people should consider their situation and the role luck plays, but not as a scapegoat for underperformance or to avoid accountability for making poor decisions. My hope is that more people accept the reality of uncontrollable variables, and make sure they’re making the most of the things that they can control. Are you maximizing disposable income? Are you taking full advantage of "free" sources of return like employer matching contributions, and tax-advantaged accounts (Roth, etc), and making sure your asset allocation aligns with your short-term and long-term goals?

You may not have a windfall of a dozen above-average years to boost your wealth, but by focusing on the things that matter more – stuff you can actually control – you will have a much easier time reaching your own goals. You can do it. I believe in you.

Jason