Edition #20: Investing, Fast and Slow

Plus: If What You Love Is On Sale, Idle Money, Yearn.Finance, Taxes, and Cabo

written by oz chen

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Today’s compliment: you’re a smooth operator.

A lot of people’s portfolios are looking red this week. Is it inflation? Is it profit taking? Is it Elon’s bit on SNL? Whenever there’s panic in the market and patience is wearing thin, it’s a great time to slow down. I’ll start with that idea and expand on it in the money medley.

🚥 Investing, Fast and Slow

Slow is smooth. Smooth is fast.

Navy Seals

Nowadays, you can’t walk down any philosophical aisle without bumping into ideas from Thinking Fast and Slow. The book is authored by Nobel prize winning economist Daniel Kahneman, who got famous for breaking down human thinking into two systems: the fast and reactionary “system 1” and the slow and deliberate “system 2.” Always angling to draw a connection to money, I wondered: what might fast versus slow “investing” look like?

Examples of “fast” thinking in finance: impulse purchases, FOMO investing, gambling, buying high and selling low. This is the land of cognitive biases; our minds make shortcuts.

I invest “fast” when I hear a friend recommend a stock and buy it without much research.

Examples of “slow” thinking in finance: conducting due diligence, long term investing, thinking in decades.

I invest slower when I think harder about certain companies, e.g. doing a write up on Coinbase or Beyond Meat.

Fast is not always bad and slow is not always good. With honed with intuition and experience, one can take quick, decisive action. Slow thinking, without good mental models, can succumb to analysis paralysis and indecision. Like the 5 years it took me to decide to cut down a dangerous tree.

Fast and slow thinking can also be complementary; deliberate practice and preparation can build good habits, enabling someone to take the right action—quickly. As John Wooden said, “Be quick, but don’t hurry.”

Money Medley

❤️ Is what you love now on sale?

You’ve been eyeing that sweet Lululemon Hogwarts Swag longer than it takes to say wingardium leviosa. The price suddenly drops 50%. You quickly snag one to be the athleisure king of Zoom meetings.

Now let’s say you have Lululemon stock and it tanks 50%. Logic would dictate that if you loved that stock, then you’d also buy it because it’s on sale. So…why is it so much harder to buy a stock when its price goes down?

It’s all about predictability. Prices for goods tend to be more stable, so we’re more confident in a good deal when we see one. Physical goods can be used and enjoyed now, whereas stocks are intangibles that can change at any moment’s notice. There’s also fear of missing out: what if the stock drops even lower?

One solution: make automatic, regular investments into the market, e.g. $500/mo into the S&P index fund. The fancy word for this is dollar cost averaging, but I think of it as FOMO insurance. Or, you can leverage some of that trusty ol’ slow thinking: “If I bought this thing at full price, and I still love it, and now it’s half price…shouldn’t I love this stock twice as much?”

Next, here’s where I’ll seemingly contradict myself…

🪑 It’s okay for your money to do nothing

“Make your money work for you” is now part of the public consciousness, which can make you feel shitty for not investing your money. It’s a disturbing idea: if you let your money just sit idle, then it will lose value to inflation. While that’s not false, it doesn’t capture the full picture.

Money sitting on the sidelines can serve as insurance if the world goes to shit. Idle money also gives you options. When your funds are not locked up, they’re free to be used or invested somewhere else. Plus, idle money can give you peace of mind that volatile markets can’t. Sometimes doing nothing is valuable.

Now, what proportion sits on the sidelines versus gets invested is a personal question. I like buying myself freedom first, then investing the rest.

But investing to get good returns is a lifelong exercise. That’s why I’m very curious about this new crypto project…

🤗 Do you Yearn for the best returns?

There’s a DeFi (“decentralized finance”) project called Yearn.finance that does something that seems impossible to do in traditional finance. It searches for the highest rates across different investments and automatically moves your crypto to earn those yields. Whaaa?

In the past, I’ve opened up multiple accounts and made transfers just to get a higher yield. New savings account paying 2% instead of 1%? Count me in. But…this is an extremely high friction process. You have to first find the better yield, open a new account, then manually transfer your money. Traditional banks want to keep your money because they make money on your money (say that 3x fast). Banks don’t have an incentive to make it easy for you to get interest somewhere else. AKA lock-in.

Via blockchain technology and smart contracts, Yearn automates all this yield chasing: deposit crypto into one protocol earning 16% (current as of this writing), and if there’s somewhere with a higher yield of 20%, you’ll automatically get it. The best explanation I’ve found is on the Unchained Podcast interview of Andre Cronje, founder of Yearn Finance.

There is a huge barrier to entry though. The UX is confusing and I’m still figuring out the basic vocabulary. What’s a vault? What’s slippage? DeFi makes me feel like a dinosaur. Yet, it’s also giving me the tingles of feeling early to something. I think tools like Yearn are going to be huge for individual wealth creation, and you can expect me to cover this alternative investment more in the in future.

🇺🇸 Pay your taxes? You did enough.

I’m a super procrastinator and will be taking most of this weekend to do my taxes before the 5/17 due date. That sets the stage for this rant…

Americans donated $449.64 billion to charities 2019, and that number has steadily increased year over year. But it’s a joke that in the wealthiest country, people need to set up GoFundMe campaigns to help pay for medical fees. At the individual level, I’m impressed by people’s generosity. At a global level, I dream of a world where the government is so effective that charity isn’t necessary.

Hot take: If you feel guilty for not donating enough to charity, don’t. You are already a decent person for paying your taxes. Don’t let anyone shift the responsibility of taking care of citizens to citizens themselves…especially if citizens are paying for that already. With taxes set to rise, we should be more concerned with government efficiency, like spending on public transit and not spending $700K on condos for the homeless.

It’s kind of like what the oil companies did with recycling: shift the responsibility of recycling onto citizens versus radically transforming themselves into renewable energy providers. Hello, where are you “Beyond” Petroleum?

💸 Cabo travel tips

To end on a heavier note…I brought back 3 lbs of guac, steak and ceviche in my belly from Cabo.

If you end up visiting, I recommend staying in the northeastern coast, which has vendors on the beach and close to a nicer downtown area. It wasn’t until the end of the trip that we realized we were staying in tourist trap near El Arco (pictured above). Also, make sure you don’t miss going to Flora Farms, an amazing farm w/beautiful dining.

I couldn’t help but compare Cabo to Cancun, which is better is in almost every way: warmer waters, wider variety of options and thus cheaper (yes), and more developed. I think Cabo is great if you just want to chillax in a resort and be near the water. But if you want more than that, then Cancun / Playa del Carmen / Tulum have much more to offer.

Just for fun: I thought we passed by the real Hotel California in Todos Santos (1 hr away from Cabo) that inspired the Eagles song. Turns out the Eagles sued the hotel over the name.

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