Avoiding stupidity is easier than seeking brilliance

Gerhard le Roux

September 2020

’It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.’ - Charlie Munger

The principle described by Charlie Munger in his Wesco shareholders letter is called inversion. The idea, beautifully illustrated by Share Parrish on FS.Blog is to flip the problem and consider it in reverse. In this instance, what will guarantee a terrible outcome and try to avoid it.

So how do we apply this principle to gain success in our long-term wealth accumulation?

It is human nature to start with the end goal in mind with our investments. We want to be wealthy and plot what we imagine to be an efficient journey to get there over time. However, this approach might lead us to chase short-term money and attractive return profiles, not keeping with our overall strategy. These strategies introduce significant risk into our portfolios that may not be well understood at the time, thus leading us years away from our goals as the returns fail to materialise or eating away at our capital. In the end, accruing wealth has a lot to do with minimising loss.

Rather than focus on what might produce success, we can focus on what will guarantee terrible outcomes and try to avoid it. To avoid being poor, eliminate the strategies that will ensure you erode your wealth. Here is a couple from the book The Great Mental Models Volume 1: General Thinking Concepts by Shane Parrish with some of my own:

How to stay poor list:

Spending more than you earn. A sure-fire way to avoid wealth accumulation.
Paying high interest on debt, so you are unable to pay back the principal on loan, leaving you on the debt loop.
Not saving as early as you can, to take advantage of the power of compounding.
Pay lots of fees.
Poor money management as fund managers try and frequently fail to match the market return while still charging fees.

Once you understand the actions to avoid, charting the path is clear.

How to build wealth list:

Be persistent in your savings while retaining discipline to avoid dipping into the cookie jar when things get tough. (This means saving excess funds into a rainy-day fund.)
Get in early. Start saving as early as you can. Please do not get stuck thinking about what you do not have; we all start from where we are. Follow the below link and be inspired.
Avoid debt where you can. Pay for the most expensive debt first and create a plan to become debt-free.
Choose your investment partners wisely to reduce your fees. Focus on administrators (Investment platform or wrappers), advisors, and investment products. If you pay more than 2% (the fees for all three layers combined), you should consider other options.
Invests in index funds and ETF's where possible to reduce your investments management fees and reduce potential losses to fund manager under-performance.

https://youtu.be/Yw4IJjaEqsQ - Follow the link and be inspired.

News and Markets – This is not normal!

The steady grind in global equities turned to euphoria in August. The US markets crashed upward to end a marvelous month up 7% and 10.46% for the S&P500 and NASDAQ respectively. The ferocity of the buying seems to catch many market participants off-guard, leading to many short sellers having to buy back their positions pushing the market even further. Below is a graph of the net short positions of the S&P500 down at 18-year lows.

‍

‍

The expectation that the markets would start to price in the uncertainty of the global economies' ability to bounce back after this crisis has not been unfounded, as shown in the disconnect between the US market and the depressed consumer sentiment in the graph below by the Visual Capitalist.

Market Returns for August

Actions to take

Stay the course. We are in a US election year, and although the market is priced for perfection, asset prices can continue to inflate into year-end. However, tread carefully. Please do not get sucked into the NASDAQ asset bubbles like Tesla where valuations have divorced fundamental realities completely. Tesla is now trading at 17.7X market capitalisation to revenue.

The South African Rand ZAR is moving stronger against the dollar, and the recent lows of R16.35 seem to be in range for the coming weeks. As mentioned last month, if you are considering moving money offshore, there might be opportunities at 16.50 soon.

Colour box

I found the Hidden Forces podcast with Demetri and Margaret Heffernan the author of the book Unchartered: How to Map the Future Together fascinating as they explore many of the various phenomena that arise from our unhealthy relationship with the future.

Whether it's the policymaker forecasting unemployment figures and growth rates, or the Silicon Valley executive predicting autonomous fleets of vehicles, telepathy, and jobs on mars, all within a decade, it is our discomfort with uncertainty and simultaneous craving for reassurance that fuels so many of the commercial and political operations of daily life.

And yet, history is an incomplete data set. We know this because the future is full of things that have never been here before. So, if we want to confront the unknown challenges to come successfully, we need to begin by acknowledging that we cannot plan for them. The best we can hope to do is prepare. Margaret's book is on my to-read list.

https://hiddenforces.io/podcasts/margaret-heffernan-uncharted/

The Bookshelf

I've read the engaging book Thank You for Being Late. An Optimist's Guide to Thriving in the Age of Accelerations by the New York Times columnist Thomas L. Friedman.

He shows how the confluence of rapidly improving technology, globalism, and climate change is altering the shape of our world faster and in so many ways that the political, social, and economic systems can't adjust quickly enough to keep up.

The resulting disruptions are creating political, economic, and social upheavals, large and small, throughout the world. Many of the disruptions hold much promise for improving the world, and the human condition and others may mark our world for near or far term, steady or rapid destruction.

If the interconnectedness of the modern world and the pace of change is of interest, you will enjoy his work.

Also,

The Obstacle is the Way by Ryan Holiday.

A great friend of mine introduced me to Stoicism a couple of years ago, and this is the second book on the topic I have read. The book is a no-nonsense guide to train your perceptions to shape your reality. I enjoyed the historical anecdotes and concise applications. This one falls into the self-help category.

Chat soon. Gerhard.

This information is not advice as defined in the FAIS Act, 37 of 2002, as amended. Trades or securities mentioned herein may not be suitable for all investors. The use of leverage increases risk, and your losses can exceed your capital. Past returns are not indicative of future performance.

| www.finova.co.za | +27 11 065 9310

‍

CALL