The Underrated Power of Incremental Improvement

By Ryan Dolan

“Continuous improvement is better than delayed perfection.”

Mark Twain

“When you improve a little each day, eventually big things occur.  Not tomorrow, not the next day, but eventually a big gain is made.  Don’t look for the big quick improvements.  Seek the small improvement one day at a time.  That’s the only way it happens-and when it happens-it lasts.”

John Wooden

A year ago I walked into my first jiu jitsu class.  Though always health and fitness conscious, I found that, at age 49, things had gotten stale.  I saw an element of the creeping complacency that hits in middle age, a tendency to retract from risks and things that scare you.  As I approached 50, and within a couple years of the empty nest, I wanted to test and humble myself in a new pursuit.  One year in, a year filled with its share of highs and a few humbling lows, I’ve learned many things about this amazing martial art and about myself.

One of my biggest takeaways is the mindset and approach needed to tackle what seems like an insurmountable goal.  It’s hard to articulate just how counterintuitive and just plain foreign jiu jitsu is to the rank beginner.  I spent the first handful of months feeling like I was drinking information from a firehouse, with no ability or sense of how to even begin to pull the strands together. I was at the long stage of “unconscious incompetence”-I didn’t even know that I didn’t know.  This wasn’t some abstract, mental observation-this ignorance was being exploited by my training partners.  It’s brutal and demoralizing.  As one of my teachers recently said, “your first year in jiu jitsu means being the nail.”  Exactly, a nail in a room full of hammers.  

Now, a year in, I can say I am worlds away from that newbie walking into the gym for the first time.  I’m still a total beginner, but the process has unearthed and built a degree of resilience, toughness and persistence I didn’t know I had.  One key virtue that has been strongly reinforced is that of incremental  improvement.  My progress improved meaningfully when I stopped focusing on getting better at a dozen different things (very easy to do in jiu jitsu), and instead worked hard at the one or two most important gaps I needed to fill.  

You learn to celebrate your small “wins.” My skills were haltingly improving, and I was having more luck rolling with other beginners.  My teachers reiterated that the only  way to get better was to focus on the one or two key skills I needed right now, then to drill those extensively, to the exclusion of everything else.  For me that meant a focus on defense: guard retention and submission escapes.  I would work on one or two elements of each over and over, and once I reached some level of proficiency, I would slowly add others.  

When you spread your focus too wide, you end up getting better at nothing.  Your progress stalls and you drift, despite showing up and putting out.  You need to define- narrowly daily, weekly and monthly goals and how you will define progress.  From there, you work to make steady, incremental progress.  When done correctly, the progress you make tomorrow will build off that of today-no matter how small.  Right now it’s the X guard, just X guard-over and over.  Am I better at it today than yesterday?

John Danaher, arguably the best coach in jiu jitsu today, believes incremental improvement is crucial to all growth:

“I’m a huge believer in the idea of small, progressive movements toward goals…If I can improve my performance in any given area by a very small percentage, and then add on that day-by-day, you get this compound interest effect, where at the end of five years, something quite remarkable may have happened.”

Most of us tend to approach any plan for transformational growth and improvement in a similar way: we set several big, audacious goals on short deadlines which demand radical changes.  In short order, the immensity of the goals, coupled with their completely unrealistic timeline, very quickly extinguishes our willpower, leaving us more frustrated and deflated than before-more convinced that we don’t have what it takes to surmount these challenges.  

I’ve seen the effectiveness of using incremental improvement with my planning clients.  The key is to get them focused on the one or two most important areas needed to drive financial growth.  For some it’s driving a higher savings rate, for others it’s building an increasing capacity for investment volatility, for others it could be placing more focus on the needs of the future than today’s.  Once you have these identified, then you build a plan to achieve near-term (the next month or quarter) progress.  The key is to set initial targets gentle enough where progress seems easily attainable.  Once these are hit, we slowly increase the pace.  The key is steady progression and pressure that builds over time.  

By jumping over low initial hurdles, small enough to not trigger the fear and anxiety of large change, clients are encouraged and motivated to take on more.  By focusing on the next small step needed today, and not the immensity of what needs to happen over the next 5 or 10 years, progress and accountability have a much higher chance of success.  

A recent example of this in action involved a client who, when he initially came to me a couple years ago, had been sitting in cash for much of this long bull market.  A pessimist by nature (he would say realist), he had a very skeptical view of equities, which he viewed as highly overvalued, overstimulated and prone for a big fall which he’d like to sidestep with his considerable cash hoard.  As we defined his ambitious financial goals (still 10-20 years out), it was clear equities were going to need to be an important piece of the picture.  

We discussed how markets had been overvalued and overstimulated for years and that his decision to be completely out of the market had materially impacted his financial life.  We talked about how equity volatility risk is markedly reduced with long time horizons, and that it was essential that he work to build a more bullish long term orientation.  Finally, we discussed the need to cease black and white thinking (all in/all out) and instead take a more incremental approach.  

We created a plan to put a very conservative amount of his portfolio in equities.  We also built a proactive plan to incrementally increase his equity exposure over time.  If in the interim, the market materially dropped, we agreed to a more aggressive reinvestment plan.  

Everything was going smoothly until this year.  Falling equity markets and dire headlines had sparked a relapse in my client’s “world is ending” fears.  I calmly reiterated that the overwhelming majority of his portfolio was in cash and T-Bills and that we wanted this to happen as it gave us an opportunity to increasingly lean into equity exposure.  

I had a call with him the other day.  I was doing periodic rebalancing of client portfolios and said that I was adding equity exposure with the market down over 20%.  It was a small addition of exposure, and while he wavered initially-he ultimately agreed.  He is slowly overcoming a mental bias which has caused deleterious damage to his long-term wealthy.  

Incremental progress works, whether helping prevent you from getting strangled on the jiu jitsu mats or overcoming challenges in your financial life.  The right combination is defining one or two core goals, developing the right template and scorecard for incremental progress and the right coach working arm-in-arm with you throughout the process.  

Progress over perfection.  

Dolan Partners works with professionals and business owners primarily in the real estate and lending, technology and executive search industries.  

We work with clients who are at least 40 year old, have at least $750,000 in investment assets and are solid savers.  

If you’d like to learn more, schedule a 20 minute introductory call.

“To Save or Not to Save: That is the (Critical and Largely Unchangeable) Question”

By Ryan Dolan

Your savings rate (how much you save in relation to your pretax income) is one of the simplest and best predictors of your financial future.  A high savings rate embodies a strong financial mindset: humility, delayed gratification, a focus on prioritizing economic growth and security over lifestyle.  The longer I work with people and their money, the more I have come to believe in the power and simple elegance of this number and what it represents.  

At the same time, I also strongly believe that the capacity to save (or not save)  is largely innate.  While it can be improved at the margin, it is a largely unwinnable battle to  turn a non-saver into a strong saver.  The ability to save, in other words, is overwhelmingly nature and not nurture.  A landmark study looked at the savings behavior over time of fraternal twins and found that “individuals are born with a persistent genetic predisposition to a savings behavior.”  While the authors found that parenting influence had some impact on young adults, they found that spending gravitated back to genetic factors by mid-life.  My own experience as an advisor echoes this.  

Competence in any professional field involves knowing what you can do, and maybe more importantly, what you can’t. Knowing how crucial savings is to driving good financial outcomes for clients, while simultaneously understanding how limited my capacity to effect large change in this area, is professionally humbling.  But it’s unavoidably true.  As Charlie Munger once said: ”If you don’t know how to save, I can’t help you.”

Munger’s partner Warren Buffett observed a trend about companies in the same competitive industry, one with a history of the highest profit margins in the industry, the other with the worst.  Typically, the high profit margin companies, in spite of already being leaner and more efficient than the competition, are almost always able to maintain and even extend these margins over time.  They are always finding ways to cut costs. These companies present a tailwind of pleasant surprises to their owners.  Conversely, the competitor with the worst profit margins, in spite of the highest costs and imost nefficiencies, seems to face a litany of unexpected cost overruns and financial problems-headwinds abound.  

This matches my experience with clients. There is a far higher likelihood of driving a client’s 20% savings rate to 30%, than it is taking another from 0% to 10%.  Perhaps it was due to professional overconfidence or maybe my inexperience, but I used to think I could reform chronic undersavers.  I believe my motivation was sound-nothing can be more impactful than pivoting someone from not saving to saving.  If achieved, it could literally change their lives.  In almost every case, however, this was largely a mirage, in spite of the best-intentions of everyone involved.  

Take a couple I’ve worked with for a few years, the Danahers (not their real names).  In their mid 40s, he is a technology executive and she a homemaker.  His income had grown considerably over the prior few years, rising from roughly $500,000 to $1.2 million.  So far so good. But as I constructed their initial balance sheet and dug into their cash flow trends, alarm bells started going off almost immediately.  Their net worth was very low relative to their age and income history.  Worse (and relatedly) they didn’t seem to be saving much of any money, in spite of ramping income.  

The couple owned two pricey homes, their primary home in the Bay Area suburbs and a vacation home in Lake Tahoe purchased the prior year.  The homes dominated their balance sheet: their assets were overwhelmingly concentrated in this low return, illiquid, negative cash flow asset; and the mortgages led to a very high debt-to-net worth ratio.  The homes were responsible for a huge cash flow headwind, with high fixed and variable costs.   

For a couple who saw their income more than double in the prior few years, I would expect to see a minimum savings rate of 20% .  Looking at the prior year, when income was close to $1 million, it appeared they were burning cash.  I almost didn’t believe the data-and yet the numbers were accurate. The culprit: the new home and relentless lifestyle creep. 

I took them on as clients, with some reservations.  I knew from experience that this would be a challenge, but I liked them and believed marked improvement was possible.   The couple was intelligent, and knew they needed to make big changes.  My goal in year one of the relationship was, I thought, modest: move to cash flow breakeven in the first six months and target a 5% savings rate in the second.  Given the husband’s strong income projections for that year, and the obvious fat in their spending, I thought it a low bar. 

It didn’t happen.  

We did get to cash flow breakeven, but it took nearly 9 months.  I was dismayed at how out of control and unpredictable their spending was.  Now, a total of 18 months into the relationship, they are finally saving-about 5%-but it has been a titanic struggle, and well short of what I thought achievable by now.  

While the progress we’ve made is meaningful, I’ve found the experience deflating.  I figured if I could find the right words, or clearly define how change would benefit their family (and stasis would potentially harm them), and yet progress has been halting.  I can see how this one factor is creating stress and tension in the couple individually and as a couple.  They seem completely stuck on the so-called Hedonic Treadmill, were income increases, but spending increases even faster.  They are running faster, but not really getting anywhere.  It’s exhausting.

Worse, lack of savings leads to other problems.  The couple should sell the vacation home to right size their spending, but they are banking on being bailed out by continued home price appreciation.  I cautioned that a continuation of the strong returns of the last decade are unlikely to repeat in the next. There were worrying financial implications if they were wrong.  It’s also been a battle getting them to have a more conservative investment framework.  Poor savers almost always take a lottery ticket approach to investing, looking for homeruns to bail out their inability to save.  It almost inevitably compounds the problem.  

Like the low profit margin company Buffett referred to, the Danahers are fighting a relentless battle.  We will make solid progress for a few months, and then some new, unexpected headwind rises up.  In 2022, their spending is being impacted by high inflation-pushing their savings rate back to zero.  Working with non-savers often feels like 3 steps forward, and 2 and a half staggering steps back.  

Contrast this with another client couple of the same age.  The Tuttle’s (also not their actual name)  have been working with me for over a decade.  At that time, they were in their mid-30s, owned a home, and had a history of disciplined saving.  Working together, as their income has risen, and in spite of having three kids in the interim, their savings rate has continued to improve.  Their high net worth, coupled with lots of cash in the bank and sizable investment assets are testament to that.  Their biggest “problem” is the capable stewardship of their savings and investments.  

The Tuttle’s have been a joy to work with.  They are humble, accountable and their financial life provides them with security and optionality.  They view their resources primarily as security and optionality for them and those they love-not as things.  I will not quit on the Danaher’s and am committed to fighting in the trenches with them, but it’s not something I would do again.  

When meeting with prospective clients today, one of the first things I look for is an ingrained savings history.  If it’s there, and they are a fit, I’m confident I can help drive it higher and build a long term path to independence and financial security.  If it’s not, I will turn the engagement down.  In spite of how much help someone needs, how smart and capable they are, no matter how bright their current and future prospects-I find that it’s simply too hard, and my capacity to change the situation too limited to work with them.  

Are you a saver or not?  If you are-congratulations.  You likely have a sound financial future foundation which can be optimized and enhanced with the right advisor.  If not-I’m sorry.  Even the best advisor with the most honorable of intentions is likely not enough.  

Sad, but unfortunately, very true.  

Dolan Partners works with professionals and business owners primarily in the real estate and lending, technology and executive search industries.  

We work with clients who are at least 40 year old, have at least $750,000 in investment assets and are solid savers.  

If you’d like to learn more, schedule a 20 minute introductory call.

"Investing: 'Everybody Has a Plan Until...' Well, You Know How it Goes"

By Ryan Dolan

“Everybody has a plan until they get punched in the mouth.”

Mike Tyson

Willard: ‘They told me that you had gone totally insane, that your methods were unsound.’

Kurtz: ‘Are my methods unsound?’

Willard: ‘I don’t see any method at all, sir.’

Apocalypse Now

It never ceases to amaze (and depress) me how so many otherwise smart people make poor investment decisions.  Though the big concepts and principles behind successful investing are relatively simple in concept-it’s the execution, day after day, year after year that often prove problematic.  For something as critical as preserving and growing hard-earned savings over a lifetime-the act of building independence and security for you and those you love-why do so many resort to a pastiche of such ill-conceived, ad hoc investment approaches?  For far too many, there doesn’t seem to be any investment method at all.  

I’ve spent close to two decades looking over the portfolios of prospective clients.  In the majority of cases,  it’s hard to find the logical investment thread.  Typically, the investor has little to no idea of the portfolio’s asset allocation, performance, fee structure, yield or tax efficiency.  Worse, they often have no idea of how much their goals will actually cost, and how to build a plan and portfolio that has the best chance of getting them there.  

I can empathize with people who manage their own money-investing well takes time, attention and emotional control.  Most often, their portfolio is a grab bag of securities that sounded good at the time, but over time morphed into an incongruous mess, totally unfocused and unsuited to their needs.  Less understandable are the cases where the person has been working with an advisor who has structured a wholly inappropriate portfolio.  A far too common result.

Solid investing comes down to both science and art.  The science is having a sober, serious, well articulated and historically informed process. But perhaps more important is the art:  understanding and managing the very real and very human biases and misconceptions that we all have, and so often lead to avoidable  investment unforced errors.  The magic combination is a partnership that marries the hard skills of a sound investment approach with the soft ones of managing the client’s behavior.  

Markets in 2022 have been volatile, with both stocks and bonds down mid single-digits.  The former darlings at the speculation end of the equity market (and crypto) are down far more.  This change in the investment winds, should it persist, could have a materially adverse impact on those operating with little investment process.  

As always, when you find yourself in a hole, step one is to stop digging.  Now more than ever, it’s important to step back and get your bearings.  Many investors have made the classic mistake of confusing good investment returns in the last few years with a good process.  As the saying goes, “Don’t confuse brains with a bull market.”

It’s time to have a more sober (and adult) approach to investing.  Here is a compendium of my recent investment-focused blog posts. Enjoy.

“Wrestling the ‘Inflation Dragon’” (June 8, 2022)

Thinking in real (not nominal) terms, the inflation-resistance of a high savings rate, and what worked (and didn’t) in the inflationary 1970s.

“When Smart People Do Dumb Things” (May 25, 2022)

Investing lessons from Bill Hwang and the Archegos blow-up: trying to get rich quick in investing, your capacity vs your need to take investment risk, beware investment genius married to dodgy personal ethics.

“Faith or Fear?”  (March 24, 2022)

The wisdom of long-term investment optimism married with shorter-term realism.  Fear of the future is a recipe for subpar long-term returns (and unhappiness).

“Defining the ‘Why’ and Crypto” (February 11, 2022)

An email to a client arguing against buying crypto.   

“Day Trading: Diving Into Shark-Infested Waters With a Bloody Nose”  (May 28, 2020)

The long-awaited return of the day trader, in hibernation since the late 1990s.  A prediction that outcome today will distinctly not be different.  Just don’t.  

“In Markets Like These: 1. Breath, 2: Return to the Fundamentals” (March 13, 2020)

In the midst of the Covid meltdown, a review of Ben Graham’s “The Intelligent Investor.”

“To Invest Well, It Helps to Have a Map and a Copilot” February 11, 2020

A friend who “went 100% to cash,” and why it helps in investing to have a map and a partner.  

Dolan Partners works with mid-career professionals in the technology, real estate and executive search fields with at least $750,000 in investment assets. 

Learn more here.

Complacency: Silent Killer

By Ryan Dolan

“Success will continue only as long as the commitment to the process of being successful remains in place.”

Nick Saban

“I don’t think complacency is a word they understand in Tuscaloosa.”

Kirk Herbstreit, football analyst

Last year, I had a client meeting with Ben and Tina, a couple in their late 30s.  We’ve worked together for several years.  they’re motivated, humble, engaged and accountable.   Importantly, they are candid and have a deep desire to learn and get better personally and financially.  The pain point that brought them to me in the first place was a common one for people their age: their ad hoc approach to managing their financial life was leaving them feeling anxious, overwhelmed and not at all sure that they were on the right path.  They made the smart decision to start taking their money seriously at a relatively young age, and are committed to making congruent, long-term decisions for their young family of five.   

I started, as always, with discovery: unpacking who they are, the road that led them to today, and to begin to identify where they want to go.   We discussed the couple’s financial history, experience and backgrounds.  Both came from humble financial circumstances, and exhibited some unease with their increasing financial resources.  They shared a distinct sense of financial vigilance-almost paranoia-a fear that everything they built could be taken away at a moment’s notice.  It took time, but we worked to unpack this mindset, which though understandable given their histories, was limiting and ultimately not constructive to making better decisions.  As we worked through the process, they began to develop a healthier relationship with their money, which resulted in more confidence and calm-and better outcomes.    

Then about three years ago, the couple’s financial life, which had been on a very solid trajectory, hit a higher gear.  Ben’s income had soared from $500,000 to nearly $1.5 million due to strong industry trends and a big promotion.  He also had a big chunk of employer stock vest creating a large jump in net worth.      

So far so good.   

Slowly at first, I noticed a subtle and distinct shift in the couple’s attitudes.  While the irrational financial anxiety and pessimism that characterized their earlier mindset was gone, the engaged accountability of recent years had slowly given way to something concerning: I was seeing the early signs of complacency.  It showed up in several financial areas, but perhaps the most obvious was the couple’s spending.  For most of our working relationship the couple diligently kept spending at levels that allowed them to hit ambitious savings targets.  

However, in recent quarters, signs of significant lifestyle creep started to appear.  Despite surging income, the couple was on track to post a lower 2021 savings rate than in 2020-a worrying development.  Worse, the couple seems unaware and disengaged from these developments, though promised to exert more focus and effort.  

The next quarter, the spending picture deteriorated further. I pointed out that income is often much more volatile than spending.  In my experience, once a higher level of spending becomes ingrained, it is very hard to cut it by more than 10%, even if income falls considerably more than that.  The couple admitted it had been a big spending year, but they hadn’t had a down income year in a decade, and from the vantage point of late-2021, 2022 looked to see a continuation of strong income growth.

The past 15 years has been an unusually benign financial backdrop for affluent Americans: surging asset prices (real estate, stocks, bonds, crypto); record low interest rates coupled with easy credit; low financial volatility; low taxes (at least relative to history); and rising incomes.  As I look around, there are many landmines which could derail this goldilocks backdrop: persistent inflation and rising rates, a fall in very richly valued assets, retreating financial liquidity, the risk of a recession.  But perhaps the biggest and most pervasive threat today is one that always lurks after long periods of prosperity: complacency.  I see it everywhere: in markets, governments, big companies-and individuals.  Of all the behavioral mistakes that successful people can fall prey to financially, complacency is perhaps the most under-recognized and potentially dangerous.

Complacency sneaks up on people.  It starts small and low-impact, but once it gets a foothold, it tends to metastasize.  It’s difficult to diagnose, because it typically occurs against a positive backdrop.  Your income’s growing, your saving, your portfolio’s done well-the future is bright-what’s the problem?  

Complacency has always been a threat to enduring growth and success.  However, the financial consequences of complacency seems to have grown in recent decades.  In “The High-Beta Rich'' author Frank Rich details the increasingly ephemeral nature of modern wealth in relation to history.  Over the past four decades,the volatility of wealth (easier to build and harder to hold onto) has clearly grown.  Now more than ever, it is critical to realize the stakes have been raised-and the penalty for complacency is potentially more severe today than in generations past.  

Heading off complacency is critical, but not easy.  Which leads me to Nick Saban. 

Three weeks ago, my wife and I dropped our oldest daughter at the University of Alabama for her freshman year.  It’s an exciting time.  A huge college football fan, I’ve always been fascinated by Saban and the dynasty he has created in Tuscaloosa.  Standing outside Bryant Denny stadium, I wondered how this 70 year old, who has accomplished everything possible in his field, maintains such drive, intensity and focus?  How has he created such a durable culture of success and sustained it against a constantly changing backdrop of players and assistant coaches?  

I recently finished Saban’s 2004 book, “How Good Do You Want To Be,” and it became clear the many shared parallels between a coach and his team and an advisor and his client.  

Here are some core points and quotes from the man himself  and how it relates to your money.  

You need a roadmap

“Who you are.  Where you are.  Where you are going.  How are you going to get there.  You need a road map to give you direction.”  
Without a roadmap, a mission statement-unfocused, undisciplined behavior-complacency in a word- is almost inevitable.  While there are universal financial principles that must be adhered to, we all need a custom-built template that keeps us anchored to our defining core values and goals.  If you can’t define your “why,” good luck with the “how.”

A culture of expectations

“The major by-product of creating a mission statement and vision is that it creates a culture of expectations…The expectations are clear, the consequences are laid out, and behavior is modified and reinforced to be in concert with the culture”

Once we have a roadmap, I isolate the handful of key priorities and set demanding, but achievable targets for clients.  Importantly, the clients know that every quarter, there is an expectation that these will be hit.  The social pressure of knowing we are going to sit down and discuss performance helps drive accountability.  

Beyond the social pressure, I will run financial projections of how errant behavior, if continued, will blunt long-term financial growth.  

“Don’t look at the scoreboard.” Focus on what you can control

“We don’t worry about our rankings, our record, or how other teams are doing.  In fact, we avoid looking at the scoreboard within individual games…Don’t be relieved when you are successful and don’t get frustrated when you are failing to have success.  Stay focused on the next play to dominate.”  

 “Spend your time working on what you can control-your actions, words and emotions.”  

I keep clients focused on the controllable financial inputs that really drive the needle in their lives:  a high savings rate, a tolerance for equity volatility, patience, and deferred gratification to name a few.  Most new clients, in my experiences, want to focus on important but unknowable areas, or domains in which they have no expertise: predicting the market, individual stock picking, higher investment returns, etc.  

“Anticipate problems and prepare” 

“‘Close the barn door before the horses get out’ my father used to say. Spending the time and energy to think ahead and anticipate problems is a lot less work than having to deal with the problem once it occurs.”

A key question I continually ask clients is “What can go wrong?”  This question is never more important, and never harder to accurately answer, than when everything is going well.  It’s all-too-human, and self-serving, to only plan for what can go right.  Avoid this.  

“The importance of motivation”

“Motivation gives you a reason and a passion to do the things you love to do and to push through the things you hate to do.  Knowing what you want to accomplish is the key to being motivated.”

In the early months of 2022, I used many of these principles with Ben and Tina.  We spent time refocusing on their mission and roadmap, and highlighted how recent behavior wasn’t aligned with building long-term financial security and protecting the people they love.  I pointed out how their entire careers and adult lives had taken place against a very positive economic backdrop, and ran projections of how a shift in the environment would impact their financial life.  

I pointed out the high cyclicality of Ben’s industry and income.  I ran cash flow “stress tests” which modeled out how the couples’ cash flow could be impacted in a modest recession and a severe one.  The results, given the sharp increase in spending, weren't pretty.  

Ultimately, Ben and Tina’s complacency was caught early.  I think what  got them to level-up was being reminded of their core motivators: providing for their children, a commitment to giving to charity and the desire to create financial independence and autonomy.  These factors are, for them, more enduringly motivating than the quick fix of excessive spending.  

Their unfocused spending was largely the result of losing sight of their roadmap, and the key motivating factors behind it.  People can lose their motivation when they think their money is all about themselves and their gratification.  Reorienting the couple on their key mission was enough to get them reengaged and refocused.

I just had my most recent client meeting with the couple. 2022 has brought a sharp financial u-turn Ben’s income has suffered with rising interest rates, and income-at least in the short-term-is down by more than 50%.  Due to the couple’s recently reengaged spending discipline, they are able, in spite of this drop, to remain cash flow positive.  They have plenty of liquidity to not only survive this period, but to thrive.  Complacency, had it not been reversed, would have left them in a much more concerning position.  

How about you?  Has financial complacency burrowed its way into your mindset and behavior?  Do you have an advisor dedicated to understanding you and your family and committed to building a “process” around your money and goals?  

At Dolan Partners, the core mission is a simple one: to help good people make better decisions with their money.  Learn more today: www.dolanpartners.com

"Wresting the 'Inflation Dragon'"

By Ryan Dolan

Inflation.  We are slapped in the face with this new and unfamiliar reality on a daily basis-at the gas pump, the grocery store, trying to make summer vacation plans.  Prices are up and quality is down.  Financial markets are starting to feel the inflation threat-with stocks and bonds both plunging.  While the impact on the red hot housing market has to this point been muted, surging rates, should they continue, present a real threat.  

The big (and it must be stated at the outset) and largely unknowable question: is this inflationary surge temporary or structural?  The answer will have profound financial implications.  

Throughout 2021, politicians, central bankers and investors believed (or wanted to believe) that this surge in inflation was a momentary, short-lived result of Covid stimulus and supply chain issues.  They were wrong.  Kevin Warsh, a highly respected economist and former Fed official (don’t hold that against him), thinks the risks of inflation getting away from policymakers is high:  

“Inflation is the sincerest form of fakery: a surge in the cost of living that robs Americans of the fruits of their wage gains.  An incomparable asset boom predicated on perpetually low interest rates.  Alchemy for an overly indebted nation.  Inflation is a choice.  It’s a choice for which the Fed is chiefly responsible.”

“Leaders in Washington are unnerved, and they should be.  Their actions so far have been unequal to the challenge.”

“Inflation is a clear and present danger to the American people.  Extraordinary excesses in monetary and fiscal policy caused the inflation dragon to resurface after 40 years of dormancy.”

Few living and investing today have experience operating in an extended inflationary environment.  The behaviors, tactics and mindset perfectly suited to the low inflation/low interest rate environment we have grown accustomed to, would be exactly unsuited in a rising one. 

Here are some thoughts on trying to adjust to the specter of a new inflationary reality:

Think in real, not nominal terms

Over-indebted governments use inflation as a silent tax to work down their debt load.  Inflation is more opaque, the responsible party less obvious than a politician taking away government benefits or raising taxes.  But the financial impact on citizens is every bit as real.  

Think of all the ways governments can use inflation to work away debt.  First, they understate true inflation, keeping their finger on the proverbial scale-be very suspect of “official” inflation numbers-assume the true number is higher.  By understating inflation, governments keep their funding costs (Treasury rates) artificially low.  The trickle down to citizens are numerous: too much money chasing too few goods leads to surges in their day-to-day costs; Social Security Cost of Living Adjustments don’t keep pace with inflation, eroding their real value; the tax deferred amounts you can contribute to retirement accounts and HSAs go up in nominal terms but down in real terms; the real amount you can gift tax-free also falls.  The ways to swindle citizens are limited only by the deviousness of the bureaucratic mind.  

As nominal prices spiral higher, for example home prices, the tax “take” goes up.  Whereas most Americans wouldn’t have to pay capital gains on a house sale a decade ago, now more and more have gains in excess of the $500,000 home sale exclusion, even though inflation played a large role in that increase.  

Look at Treasury bond holders, who are loaning the government money at negative real interest rates.  That’s bad enough, but consider they are paying tax on nominal interest income-thereby further exacerbating their true net losses.

Think your income went up 15% in 2021 vs 2020?  If the inflation rate was 7% as the government says (it was likely 10% or more), much of that gain was illusory.  Worse, like capital, all of that nominal income is taxed. 

Though it can be depressing, force yourself to think in real, not nominal, terms.  

The primacy of a high savings rate

For those who were already having trouble saving before, the onset of inflation is having a big negative impact.  It’s why I continually hammer clients on keeping spending in line and work with them continually to build and maintain a robust savings rate-it helps insulate you from many forms of financial threat-including inflation.  

A high savings rate is the absolute cornerstone of financial security.  A 25% savings rate can handle a sustained inflationary shock.  A 5-10% rate cannot.  Reviewing client spending patterns, the typical household saw spending increases of 10-15%  from 2020 to 2021.  While part of that is an unfavorable comparison with artificially depressed pandemic spending in 2020, a considerable portion was inflationary. If you don’t focus on cash flow and savings, I can almost guarantee your increases were higher.  

There is never a more important time to target increased savings/decreased spending than in an inflationary environment.  If you’ve let your spending discipline grow slack, it’s time to refocus and get accountable.  If this inflationary cycle progresses, it will bury many low-saving Americans at all income levels.    

Investing implications

The last prolonged inflationary cycle in the US occurred from the late 1960s to the early 1980s.  At the start of that period, asset prices, debt levels and confidence were high.  By the end nearly, stocks, bonds and real estate were beaten down, debt was a four-letter word and the American psyche was battered and demoralized.  

The conventional wisdom of stocks as an inflation hedge were adamantly disproved in this period.  From 1968 to 1982, the aggregate real return of the S&P 500 was -63%.  Think about that: you have $1 million, and fifteen years later, after 15 years invested in stocks, the purchasing power of that portfolio fell to $370,000.  Ouch! That will test the mettle and conviction of even the most patient buy-and-holder who thinks they have a rock solid risk tolerance today.  

Historically equities do best in low and falling inflationary periods.  Conversely, deflationary environments and high inflation environments (say over 5-7%), have historically been bad for equities.  Also, asset valuations matter.  Cheap equity markets tend to be far more inflation-resistant than dear ones.  This applies to real estate as well.  At a time of bubble-like valuations in stocks and real estate, don’t get too seduced by the inflation-resistance of these assets.  

How should you structure your portfolio?  Well, bear in mind that the exact right portfolio for a low rate, low inflation environment (very high equity exposure, a tilt to growth stocks) would be badly impacted by inflation.  Did you shoot the lights out in 2021?  Chances are you are getting spanked in 2022.  Look at your compound returns for the two years-how are you doing?  Chances are you are down on a net basis.  

You should have a diversified portfolio that is built to your needs and attributes and is balanced against the range of outcomes which could occur.  At the moment, this range seems particularly wide to me.  Having some inflation resistant assets, and tilting away from ones that need low inflation/rates seems prudent to me.  

Debt

Generally speaking, having some fixed-rate debt during an inflation cycle makes sense.  As inflation increases, the real value of the debt decreases, while your financing cost remains unchanged-a great combination.  I’ve long been a strong proponent of the fixed, 30 year mortgage.  It’s an instrument that gives the debtor lots of positive optionality: If rates fall, you refinance at a modest cost; should they rise, however, you keep the mortgage for decades, reaping the benefit.  

I am not a fan of adjustable rate debt-particularly now. Falling asset prices financed with constantly increasing funding costs is a brutal combination that I don’t recommend experiencing first hand.

The last extended inflationary cycle was in the 1970s-a long time ago, a time of significant financial (and societal) change.  From a financial perspective, it was a very challenging period to build and sustain wealth.  But there was a silver lining in this dark cloud:, by its culmination in 1982, stocks, bonds and real estate were generationally undervalued, interest rates and inflation peaked and were beginning a 40 year descent, and debt levels in the economy were trivial.  It was a glorious time to have liquidity, a clear head, and the willingness to invest.   

Getting there in one piece financially, was the hard part.

The Icarus Files (Chapter 3): Archegos

By Ryan Dolan

We all love success, winners.  As a society we celebrate them, study their stories and build narratives.  Often these narratives can lead to flawed perceptions.  It is a common narrative, for example, to assume rich people are, by definition, smart people.  While in some cases financial success is a result of unique brilliance and skill, it is often more prosaic intelligence combined with hard work, favorable tailwinds, with a healthy dollop of timing and luck. 

Another narrative is to assume rich people will stay rich.  I’ve studied enough financial history, and witnessed first hand that far more people make a fortune than keep it.   Over the last twenty years, despite being a time of large wealth creation, sustaining wealth seems to have grown more elusive.  A book, “The High Beta Rich” details the growing ephemeral nature of today’s wealth.  

We tend to judge performance and success, our own and others, on too short a timeline.  As Charlie Munger is fond of saying (paraphrasing), “Don’t judge someone’s life as a success until they are dead.”  The short-term ups and downs are mostly noise not signal.  We can’t really determine how a person, or a portfolio, really did without a lot of observable data.  Whether we want to accept it or not, over a long life we are all on a wheel of fortune, with its cyclical rhythms of tailwinds and headwinds, good runs and difficult ones.  While some experience more volatility than others, none escape it.  It is critical to understand, manage and plan for the inevitability of this, not naively think you can avoid it entirely.  

What separates the few who build and sustain financial security and freedom from the many who flame or sputter out, is mindset.  This mindset doesn’t depend on overwhelming genius-but it does take a healthy combination of wisdom, the right behaviors, drive and emotional intelligence.  We need to understand our own wiring, blindspots, and biases-what we do well and what we don’t.  We need emotional detachment and resiliency, to not get carried away in the good times while not despairing when misfortune strikes.   It means never getting complacent, entitled, always growing, never letting your edge dull.  We need patience.  We need to tune out the noise.  We need to focus on running our own race, competing primarily against our own potential and not neurotically comparing your financial lives to others. We need enough humility to avoid making a myriad of financial mistakes and unforced errors.  We need sound partners who can keep us objective, focused on the big mission, and on path.  

In that vein, it is a useful discipline to study mistakes, failures, and misjudgements-both our own and those of others.  We need to review and assess our mistakes of commission (those errant actions we took) and importantly, mistakes of omission (right actions we should have taken, knew we should have taken-yet didn’t).  Many of the best investors make studying their mistakes a key part of their process. 

We also want to learn lessons from the mistakes of others-particularly those who have had a history of business and financial success.   An example from just last year was the startling financial collapse of Archegos Capital and its founder, Bill Hwang.  Archegos, a family office that managed Hwang’s personal fortune, looks to have vaporized perhaps as much as $20 billion in a matter of days.  Hwang’s is a rags-to-riches-to-rags story that is worth studying. 

The son of Korean immigrants, Hwang was an unlikely Wall Street billionaire.  After working his way through college and business school, Hwang took a job as an institutional stock salesman for a second-tier firm.  Hwang was a natural, and over time caught the ear of legendary investor Julian Robertson and was ultimately hired by Robertson’s firm Tiger Management. After a very strong 25 year run, Robertson and Tiger struggled mightily in the late 1990s bull market, and ultimately decided to return investor money and operate as a family office to manage Robertson’s fortune.  Robertson himself stepped back from active management in 2002, and tasked six young proteges, all in their 20s and 30s, to run his money.  Hwang was one of the now famous “Tiger cubs,” and focused on Asian stocks. 

From 2001 to 2007 his fund, Tiger Asia, averaged 40% investment returns, and Hwang, at 44, was worth close to $1 billion.

And yet, success didn’t appear to go to his head.  Hwang was well-regarded, affable, quiet and unassuming. He lived a fairly simple lifestyle, with little sign of personal extravagance. This personal austerity did not extend to his investing.  From the beginning, he was known for his aggressive risk-taking and tolerance for volatility.  At the same time, there were questions about Hwang’s integrity, such as his proclivity of engineering squeezes in certain heavily shorted stocks.  

Amidst performance pressures following the financial crisis, Hwang appears to have let his ambition push him into overtly illegal activity.  Investigated by US and Hong Kong regulators for 4 years, Hwang was ultimately convicted in 2012 of insider trading and market manipulation.  He was banned from managing outside capital, barred from the Hong Kong securities markets, and paid a $44 million fine. Tiger Asia was shuttered, and Hwang was an industry pariah.  It looked like a calamitous flame-out to a once brilliant career. 

Hwang took his still considerable fortune, reported to be $200 to $500 million, and set up a family office, Archegos Capital in 2013.  Barred from trading in much of Asia, his prior area of focus, Hwang pivoted to US growth stocks.  He took huge, concentrated positions in a handful of stocks including Netflix, LinkedIn and Amazon.  Unlike his time at Tiger Asia, he now utilized large portfolio leverage to magnify his performance.  The combination of a highly concentrated portfolio of huge winners with massive leverage, propelled Hwang’s portfolio and net worth to an extraordinary peak nearing $20 billion.  Hwang, who became a devout Christian in the aftermath of his legal troubles, continued to keep a very understated profile.  While giving close to $1 billion to Christian charities over time, he nevertheless lived in a relatively unassuming $3 million home in New Jersey and drove a Hyundai SUV.

Hwang’s portfolio continued to surge in early 2021, with many of his holdings up, inexplicably, by 50 to 100% or more.  It appears now that Hwang had orchestrated massive short squeezes in several of his holdings.  Bizarrely, as his holdings surged higher-largely on his buying - he seemed to gain more conviction and added more leverage.  He was drinking his own Kool-Aid.  At its peak, the portfolio was levered five times, having $100 billion in gross exposure concentrated massively in a small handful of stocks.  

It all began to unravel on March 22, 2021 when Hwang’s biggest position, Viacom, announced a large share offering to take advantage of its spiking share price.  This small event was the spark that set off a cascade of falling dominoes, which ended finally with Archegos’ lenders force-selling its collapsing portfolio.  When the dust settled, Hwang’s fortune was largely gone, and several of his lenders were looking at billions in losses.  Whatever assets Hwang has left will be tied up in litigation for years.  It is likely the largest and fastest collapse of a multi-billion dollar fortune in history.  

There are many lessons from this sad story, here are three:

The perils of trying to get rich quickly in the stock market:

The stock market is a great place to build and sustain wealth over the long term, but a terrible place to do so on a short timetable.  Stocks are simply too volatile and too unpredictable to try and augment with leverage.  Investing is a long-term game, to benefit you need to survive the short term.  You simply cannot risk getting taken out along the way.  

All debt should be prudently managed within the construct of your financial concentration, illiquidity, and volatility of cash flows.  Hwang had an incredibly concentrated portfolio which was so big it was essentially completely illiquid.  To put 5x leverage on this was insane.  When it worked, it really worked.  However, if anything went wrong, the blowup risk was immense.

Don’t risk what you have and need for what you don’t have and don’t need:

It’s unclear what Hwang’s financial endgame was. What’s clear is he risked his livelihood, reputation and his family’s financial security to chase billions he would never need or ever be able to use.  As a result, everything he likely cared about, from his family to his charitable causes, to his own future will suffer terribly from this lapse of judgment.  

Don’t confuse your capacity to take risk with your need to take risk.  

You can’t get a good financial outcome with a brilliant (but morally flawed) person:

Hwang had a history of serious ethical misjudgments, from his securities conviction, to engineering short squeezes, to purposely obscuring his financial condition and portfolio holdings from regulators and his banks.  Though he had an illustrious investment career and genuinely unique skill, it was all overwritten by his poor judgment and integrity.  

Surround yourself with people and partners of unimpeachable integrity and steer a wide berth from morally flawed, self-interested people-no matter how brilliant.  

It’s been a very long bull market.  It’s also been a long bear market in humility.  Want to stay on path financially?  Study financial failure. 

"Home Run?"

By: Ryan Dolan

The housing market.  Everyone’s talking about it.  The anecdotes are unavoidable - you’ve heard them.  I heard one recently: a local family sold their home in one day at a not unusual 30% premium to an already ambitious asking price.  All cash, no contingencies, multiple bidders.  Made over a million dollars in 5 years.  Pulling up stakes and moving to Idaho.

Prices have surged so far for so long that homeowners feel justified dumping incredible amounts of money into extensive home improvements.  The remodel frenzy has gotten so bad that people are hoarding the names of good contractors, much like prized tutors.  In the odd event you can get a contractor to return your calls and bid on a project (not a given), prepare to pick your jaw off the floor at their pricing.  Everyday the streets of my Bay Area town are besieged by armies of contractors, realtors and homebuyers.  Main street over the years has less shops and restaurants and more realtors, interior decorators and architects offices.   

Perhaps this is attributable to the extended period of robust price appreciation.  With the exception of the sharp markdown in prices in the financial crisis, real estate has  been on a tear for two or three decades.  The historic recent surge in pricing over the last couple years has made people’s house purchases in say 2019, which seemed a bit toppy at the time, now look downright brilliant.   

Asset prices, whether stocks or houses, are driven in part by narratives.  Whether people explicitly say it or not, this long surge in house prices has created a widespread belief that housing is a can’t lose investment. I moved to California in 1998, and the state has been in varying states of real estate obsession and FOMO almost the entire time. And just as things tend to start in California and then spread to the rest of the country, the cult of housing has become an unequivocal national phenomenon. Lest you think the insanity is limited to the Golden State, take a peek at what’s going on in California-exodus destinations like Boise, Austin, Nashville and Miami.  In what has become a very divided country, Americans, irrespective of wealth, race, gender or political affiliation are united in their conviction that their house is a high-returning asset.  

The family home is a loaded topic that combines all sorts of emotional, personal, financial and interpersonal dynamics in a unique and sometimes volatile stew.  As an advisor, I understand that the family home represents a unique mixture of part consumption, part personal asset and part investment.  And yet in boom times, belief in the investment merits of homes tends to dominate all other considerations.  and help justify all sorts of poor financial decisions.  

It’s important to note that the investment merits of homes tend to be overstated, primarily by an industry incentivized to overstate them.  In reality, a home comes with high transaction costs and lumpy and often understated operating and maintenance costs.  This is made worse by the fact that house prices tend to barely keep pace with inflation over the long-term.  Robert Shiller of Yale has pointed out that, “From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.”  Think about that: in a century the real return on your home was flat.  And that doesn’t include the negative cash flow over that period.  

The period since 1990 has seen historically aberrant price acceleration.  This serves to magnify the financial impact of big house related decisions (buying/selling, large remodels).  Adding to this is the increasing degree of cyclical volatility in the housing market.  Take the current full cycle of 2006 to today (prior peak to current peak).  According to Shiller’s numbers, national house prices fell 36% from 2006-2012 only to pivot and surge 71% from 2012 to today.  It’s important to note that these are inflation-adjusted numbers.  

So with home prices taking a bigger and bigger portion of the affluent American’s balance sheet, and the recent trend of heightened cyclical volatility, it behooves people to make sure they are running their big home decisions through a structured and thoughtful process to help them make the best-informed decision they can.  

I have several clients at very different stages in their lives, who are pondering a big house-related decision.  NOw more than ever, you want to make sure you have a framework and the support to make the best financial and personal decision you can.  Here are a couple of the scenarios and outcomes. 

Young family: when to buy the first home?

I could feel the tension as soon as the clients walked in the room.  The couple (mid 30s, 2 young kids) had been discussing buying their first home for over a year.  Given their current financial situation and my future projections, we had reached a consensus that the financial risk was simply too high from them to buy a house prior to 2024-2025.  This created tension as the spouses weren’t united in what they prioritized.  The husband prized financial flexibility and prudence while the wife focused primarily on putting down roots and raising their kids in a home of their own.  

The spousal tension had escalated as local  prices continued to surge and the prospect of getting priced out of the market increased.  This was made worse by seeing friends around them minting big money on their homes. 

Finally, I highlighted a scenario where they continued renting, and worked at building a really robust house fund on the back of a high savings rate for an eventual 2024 purchase.  Even if housing increased 25% overall, they would be in far better shape financially to absorb that purchase.  The couple left the meeting in better spirits, though some tension remained between them. 

 A couple months later, as is often the case, patience and deferred gratification was rewarded.  The couple informed me that, quite unexpectedly, they were able to rent a far larger home at a considerably lower rent then their current place.  A family member was relocating.  They are now in a far more sustainable situation, everyone’s happy, and that eventual house purchase, regardless of what the market does, will be made on a far stronger financial footing.  

Almost empty-nesters: stay or downsize?

This mid 50s couple had very high financial concentration in their home when I started working with them.  Despite very high and rising income, savings rates were low.  After some analysis, it became clear that housing costs were a considerable part of the issue: a huge mortgage payment, high property taxes, relentless repairs and maintenance, utility costs, etc.

There are times as an advisor when you need to withhold your opinion.  There are others where you simply need to  name the elephant in the room.  While it was clear the couple wanted to stay in the home as long as possible, at least until their kids were in college, the need to consider downsizing the home needed to be discussed.  

As always, I help frame decisions by showing different scenarios and outcomes.  I first showed their current projections: put the kids through college, retire at 65, and consider downsizing the house in retirement.  To make this achievable, the clients’ savings rate would need to increase dramatically from current levels-an increase which I felt was extremely unlikely. 

Given that, I showed a scenario where the savings rate increased meaningfully (but realistically), retirement was pushed to 70, and the house sale date remained in retirement.  The visual analysis clearly showed that while the chance of success was materially higher, it was far from a given.  

In my final projection, I had savings go up a very realistic amount, pushed retirement to 67, and had a house downsize in either 2024 or 2028.  What became crystal clear was the positive transformation this would have on their financial life.  Their savings rate surged dramatically (due in large part to lower home costs), their bucket of higher-returning investment assets surged, their debt load shrank dramatically, and their real estate concentration dropped a ton.

I can tell the presentation had an impact.  They aren’t ready to make a decision in the near-term, but they know now what they can and likely will do in the coming years.  

The multi-home-owning retirees: sell one of the homes?

This constantly on the move, active, young for their age, mid-70s couple owns 4 residences (2 homes and 2 condos).  In the past couple of years they’ve used one of the condos less and less.  The running costs of this condo are the highest of any of their properties, with very high condo fees and property taxes.  

The husband, wanting to start slimming down their real estate exposure, and pessimistic on future real estate values-was considering selling.  The wife was very attached to this property, and clearly wanted to hold on.  She mentioned that should her husband pass first, she likely would spend far more time at this property and still had lots of friends there.

In reviewing their financials and future projections, it was very apparent that their exposure to real estate in relation to their income and net worth, was extremely conservative.  All of the properties were paid off, and the couple had considerable investment income.  We analyzed the travel expenses to this property, and estimated the future annual costs associated with keeping it.  We also ran different projections on future real estate returns on the property, from a sharp contraction to continued strong growth.

What became clear across all the scenarios was that the decision to sell or keep the property was largely a financial non-event for them.  The differences in outcomes simply weren’t all that material.  Their personal needs and wants should trump any financial considerations.  When presented with the 10 and 20 year projections, they agreed to simply keep it.  Thought they may readdress the decision in 5 or 10 years, the math made their decision an easy one.  

The family home.  It’s a loaded topic, at the best of times.  With the national residential market on steroids make sure you have the people and process around you to make the best informed decisions you can. 

"Faith or Fear?"

By: Ryan Dolan

“I am an optimist.  It does not seem too much use being anything else.”  

Winston Churchill

“In the long run, successful investing is essentially a battle that takes place in the investor’s unconscious mind - a battle between faith in the future and fear of the future…the investor’s lifetime return will be to a very great extent governed by which of these impulses wins.”

Nick Murray

I had a frank and honest phone call with a client the other day.  

We go way back, having worked together in a past life. He’s thoughtful and intelligent, with considerable investing savvy and experience.  He enjoys the intellectual challenge of investing, and has spent much of the last 15 years managing money-first professionally and then on his own.  

Candidly, I think what initially bonded us was our shared cynical and pessimistic view of the world and human nature (though we would have called it “realistic”).  We were suspicious of Wall Street, politicians, central bankers, the media.  Classic X-ers.  To be fair, we had seen plenty working on Wall Street over the years to warrant a pretty dark view of humanity and markets.  

Following the financial crisis of 2008 we went separate career directions.  He went to a money manager, I started my financial advisory firm.  It was then that our worldviews started to diverge.  I think my buddy would be the first to admit that his pessimistic nature became more ingrained as time passed.  The investing implications had been considerable.  As an investor, while he’s had some episodic big winners, his innate bearishness had led to years of relentlessly poor investment returns in a never-ending bull market.  Augmenting the financial toll was the psychological and personal one. He was wearing himself and those around him down fighting a negative crusade.  I understood, I’d been there-but I’d seen the light.  

When you start your own firm, there’s nowhere to hide.  Unlike working at a big company-you get an unvarnished picture of your strengths and weaknesses.  You can’t blame shift.  Good or bad, it’s all on you.  It became clear that one of my glaring weaknesses was my pessimistic worldview.  I was risk averse, had a scarcity mindset, and saw much to fear about the future.  Without question it was blunting the potential of my investing, my business, and my life.  I looked at the people I liked, respected and wanted to emulate-all of them optimists.  They were unquestionably more resilient, productive, and happy.  When life knocked them down-they recovered quickly and went on to new heights.  The pessimists, on the other hand, were downbeat, risk-averse, always seeing catastrophe around the corner.  They were - and I was - often a bummer to be around.  

I’ve come to believe there is deep wisdom in optimism.  The older I get and the more experience I accumulate, the more true that is.  I now know that it is essential to hardwire faith in the future into your personal and financial mindset.    It’s important to define what I’m talking about and what I am not.  I’m not talking about flimsy, weak-kneed, and untested optimism.  This mindset is almost worse than pessimism, as it buckles immediately when making contact with any unexpected adversity.   I’m also not talking about a belief, common today (particularly in the tech industry), that humanity is on a permanent glide-path of continuous improvement and “optimization.”  Read history.  Human progress has never been a straight line. 

No.  I’m talking about a deep faith, an ironclad conviction that, though the road will be bumpy, progress and growth are inevitable.  It’s a belief that personally we are capable of far more than we can conceive, and personal growth-in all areas-is a lifelong pursuit that never ends.  It’s the conviction that human society, over the long arc of time, gets better.  It’s a belief that thought markets can do anything in the short and medium term, there is only one long term outcome: higher.  

Back to my buddy.  

A core priority in my work with him has been trying to get him to understand this logic of long-term personal and financial optimism.  We’ve made considerable progress recently, particularly when he relinquished investment discretion on a big chunk of his money to be managed by my firm.  That was a big step.  We agreed that he would still manage a much more modest sized account-to keep his hand in the game-albeit with lower stakes.  I can see his trading activity in that account.  After months of limited activity, it erupted in a rash of hair-trigger, ultra bearish bets recently. 

I immediately got him on the phone, and gently-but firmly-called him out.  I asked what prompted this pessimistic “relapse.”  He gave me all the reasons I expected: stock market overvaluation, rising rates and inflation, tightening monetary policy, recent volatility, etc, etc.  While I understood his arguments, and considered many of them valid, I asked how this type of trading had worked out in the past?  I asked how likely it was that he would be able to successfully dance in and out of markets?  I asked how he was going to achieve his long-term financial goals without better investment returns?  I reiterated that I already had him very conservatively postured, and that the best thing that could happen for him long-term would be a big bear market where we could put a lot of money to work.  It was tough love, but it was necessary.  Ultimately, I talked him off the ledge.  

Mindset is everything.  In a time of pervasive fear and anxiety, ask yourself the question, and be ruthlessly honest: faith or fear?  Which is your default setting?  If it’s fear, you are selling your financial life-and everything else for that matter-short.