Edition #9: Shirts vs Skins

Plus! Show me your allocation, Rulebreaker Investing, Capitalist Mazes, Skin in the Game

written by oz chen

get my weekly digest on psychology & money


Happy Friday. Compliment: you consistently bet on the right horse.

You’re reading about personal finance through the lens of psychology. We’re sitting at ~441 subscribers and I’d love it if you shared my newsletter. Missed a week? You can check out the archives here.

👕 Shirts vs Skins

I used to play a lot of basketball in middle school. To distinguish between teams, we’d sometimes play Shirts vs Skins. One team will play without shirts on to identify each other. As I type this, I realize how much this excluded our female classmates.

That memory was a literal reminder of the idea of having “skin in the game.” When you play, you’re invested in the game. When you’re on the sidelines, it’s easy to play armchair quarterback and throw Cheez-its at the TV.

The phrase traces back to the derby world, referring to owners who have the most skin in the game—their racehorses.

Let’s see how this mental model helps us evaluate investments.

  • Skins: have ownership or investment in an asset
  • Shirts: do not have ownership the asset but love commenting on it

The moment that someone owns a stock, they’re invested. They’re likely to read news about the company, talk to friends about it, or buy more stock. They have skin in the game.

Without skin in the game, it’s easy to judge decisions from a distance without true understanding.

I have friends and fellow investors who hate on Bitcoin. “Bitcoin is a ponzi scheme. Bitcoin is not a real currency. Bitcoin will crash.”

This used to bother me. But then I just realize that they’re playing shirts, not skins.

None of them own cryptocurrencies, and are self proclaimed Bitcoin skeptics. So I spend more of my energy trying to lower their perceived risk.

PSA: you don’t have to buy 1 whole Bitcoin, you can buy tiny fractions of the thing.

Companies tap into the endowment effect by giving away free cryptocurrency: people value something more once they own it.

Heck, Coinbase will even give you free crypto to learn about crypto. They understand that the biggest barrier to entry is a psychological one.

What about having too much skin in the game?

Your job, your kids, the baskets you wove underwater—no one cares about your stuff more than you do.

The dark side of the endowment effect is getting over-invested and losing the ability to make rational decisions. 

I count my lucky stars that I never got roped into multi-level marketing schemes, but there were some damn close calls

MLMs try to convince people of “unlimited income potential,” then get them to pay an initiation fee and buy the products themselves. Boom: endowment effect. Now you have 100 boxes of magic fungus teas and don’t want to feel like a fool, so you try to rope your friends in on the game.

Unfortunately, these companies often target people who can’t afford the products in the first place. Sellers sometimes attribute magic qualities – like curing cancer – to their products out of desperation to sell them. 

The sunk cost fallacy is the evil cousin of the endowment effect. It’s the tendency to continue doing something once an investment has already been made, even if that investment stinks. From toxic relationships to waiting in lines for far too long, sunk costs unnecessarily tie us down.

Cutting losses is a personal challenge of mine, and that’s fodder for another newsletter.

⚖️ Show me your allocation

“My portfolio is up over 600% over the past year.”

Big numbers sound impressive and trigger FOMO. My natural inclination is to wonder “how much money did you make?” 


Portfolio value is a distraction. Portfolio allocation is the real story.

So what if I learn that my buddy’s portfolio is worth $100,000 or $1,000,000? Those are static numbers that I can’t really learn from. Instead, I’ve learned to ask fellow investors these questions:

  • What’s your largest holding, and why? 
  • How do you make allocations in your portfolio? How do you personally decide on the percentages?
  • How did you build conviction in your top holdings over time?

I don’t care about the amount; I care about the allocation.

I care about how you vote with your dollars into the future. 

In bull markets like the post-March frenzy of 2020, every investor is suddenly an expert. Take their performance with a grain of salt. Getting specific with questions leads to richer answers, like whether someone has done true research on a stock or if they’re just surfing WallStreetBets.

Wanna see my allocation? Here’s my M1 Finance portfolio.

If you want to see a deeper run-down of my portfolio (I still need to account for Robinhood, crypto and 401ks), reply and let me know.

🛠 Rules to break the rules

David Gardner, co-founder of the Motley Fool, released an excellent podcast called 6 Principles Of A Rule Breaker Portfolio. You can crib my notes on these 6 principles if you find Gardner’s speaking style too cheesy:

Principle #1: Invest in the future you want to see
Invest in a better future, not just for you “but for all stakeholders.” What are companies you believe are changing the world for the better? Your capital shapes the future.

Principle #2: Name the purpose of your portfolio + Is there money coming in?
Define if your portfolio’s for retirement, fun speculation, or other purpose that serves you. “Know why you’re doing what you’re doing.” Most of you will probably have money continuing to flow into your portfolio, and that new money should align with the portfolio purpose. Those who are living off their portfolios (e.g. retired) may need to adjust appropriately.

Principle #3: Fair starting line
Gardner is a fan of starting with a 20 stock portfolio, allocating 5% to each. He calls this a “fair starting line,” likening to horses at the start of the race, and letting them run. 

Principle #4: Establish your sleep number
What is the highest percentage allocation in a single stock that you can have and still sleep at night? A sleep number of 80 means that if a single stock comprises 80% of your portfolio, you can still sleep at night.

Principle #5: Invest through the whole race 
This is my favorite principle. Unlike gambling, which requires you to be right at the beginning and the end, the stock market allows you to bet on a horse midway through the race. That means if there’s an obvious category winner, you can still win even if you don’t buy a stock at the lowest point. This is a great way to stem FOMO. 

Principle #6: Be slow to sell
If you believe in the company, its management, and its vision, don’t be too quick to sell if the company is in a lull. Also, long term capital gains taxes are less expensive than short term. Granted, this principle requires entering a stock with high conviction in the first place.

💸 Money Tip: Online Grocers Beat Offline Capitalist Mazes

Don’t you find it devious that the healthy food is located at the edges of grocery stores? Grocers make you wade through all the chocolate and high-margin items first.

This is intentional.

During the pandemic, I started buying groceries online. I’ll start with the cons: I’m not fan of the shipping and the plastic bags that come with it.

But even accounting for transport costs, I tend to spend less than shopping in store. Some reasons:

  • Price transparency: Instead of loading up the shopping cart in anticipation of the final bill, you see the full cart online. This makes budgeting easier; sometimes seeing the cart price, I ended up taking stuff off. I guess I don’t *really* need two ice creams…
  • Less impulse buys: Those “at the cart” treats definitely work. If I don’t buy them, they certainly weaken my willpower. I can’t help but look at Mr. Goodbar and the Kimye tabloids.
  • Time savings: I’m a slow shopper. I wander, criss-cross, double back on aisles like I’ve got the time of day. Shopping online saves a bunch on logistics, but pre-ordering also means that I can time my consumption better.

Basically, shopping online forces me to be more proactive, versus reactive in shopping. And reactive is expensive.

📚 Book highlights: Skin in the Game

I couldn’t write the first article and not highlight Nassim Taleb’s book.

Here’s a couple gems from Skin in the Game:

Scars signal skin in the game.

Don’t tell me what you think, tell me what you have in your portfolio.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

Thanks for reading. See you next week.

Bye now!

P.S. Gambling vs Shares

liked this article? tell your mom, tell your kids


Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.