Review: Die with Zero

 Die with Zero is an unusual financial planning book. It starts with the famous adage, "You can't take it wih you," and unlike other financial planning books, takes it seriously. The idea is that if you're not living life to the fullest, you're not living the best life you could be, and that all the working, scrimping and saving is a means to an end: you should live life rather than working for "The Man."

The book discusses 3 major objections conventional thinking folks have about this: (1) what about the kids? (the answer is, you should actually give money to your kids while you're alive and they're young enough to make full use of those financial resources to live better, rather than waiting until they're old and you're dead!) (2) what if I love my job? (even if you do, you should spend money in such a way as to maximize your enjoyment of your job) (3) I don't want to run out of money (you should consider annuities as a way to guarantee that you have a fixed income for the rest of your life and spend the rest).

I think Bill Perkin's approach to life is actually really sensible. For instance, I know lots of people who refuse to stop working even when their health is actually deteriorated to the point where they couldn't keep up with their kids when hiking or cycling (I'm not talking about teenage kids either!).  Most of those people would have a much better quality of life if they worked less and paid a personal trainer to improve their health to the point where living is more enjoyable than being dead.

As another example: things like camping, backpacking, and expedition style bike touring are way more fun when you're young and healthy than when you're old and exhausted and aren't sleeping properly and have a chronic health condition. There's no point saving money for those sorts of trips to do when you're retired because when you're 65 you won't be able to enjoy them anyway!

I think more people should read this book and live their better life. And I agree especially with the part about giving money to your kids when they're in their 20s and 30s and able to enjoy those activities before they have kids. From that point of view alone you should read this book.

Review: Narrative Economics

 I'm a huge Robert Shiller fan, but somehow missed that he had a new book called Narrative Economics. When someone at work mentioned it, I checked it out from the library right away and read it. The book's thesis is that economists spend too much time analyzing models like interest rates but should consider ideas and stories going viral and thus causing economic events.

To back this up, the book actually goes out and proposes several different narratives/stories that could have created/prolonged the great depression. The stories all seem rather plausible but there's no proof whatsoever that these stories had massive impact. Even worse, there's no guidance as to how you could have used the stories to predict what had happened.

This book more than anything else, proved to me that if you actually want to do investing, numbers are the way to go. What a surprising waste of time.

Review: The Fund

 The Fund is Rob Copeland's take down of Ray Dalio.  Ray Dalio is the founder/owner of Bridgewater Associates, a hedge fund that purportedly had a phenomenal track record of beating the market, and Dalio himself became a celebrity, writing Principles, which was actually quite a good book, and follow on books that I thought was awfully fawning of a Chinese authoritarian system that was probably more about talking up Dalio's Chinese corporate/personal investment portfolio than based on reality.

I expected an account of Ray Dalio's rise and perhaps some expose of the secret sauce behind Bridgewater Associates, but to be honest the entire book was expose. There's an early section on Ray Dalio's background and how he got rich (hint: marry a wealthy person!), but the sections on how he managed to get pension funds to give him money to manage were given short shrift, as was the heuristics/algorithms he used to become successful early on.

Most of the book focuses on post-success, where the principles he espoused actually got turned into a horrible nightmarish social-network based pile-on app used inside the company. This mechanism was made worse by Dalio rejecting any criticism of it and taking on the form of the final arbiter. What really astonished me was that Dalio was selling pieces of Bridgewater to his own employees through an employer-financed loan. His second in command therefore was living a hand-to-mouth lifestyle:

Over just three years, 2011, 2012, and 2013, industry researcher Alpha reported that he made $815 million in total. While just a fraction of Dalio’s compensation, it was also enough to vault Jensen onto the industry lists of the highest-paid hedge fund managers—he made more than most of those who ran their own firms. Only a handful of people knew, however, another reason for him to stay. The Bridgewater founder had concocted a complicated arrangement in which the more money that Jensen seemed to make, the more he actually owed. Dalio had challenged Jensen, as a condition of the younger man’s employment, to slowly buy out the Bridgewater founder’s ownership. Jensen didn’t have nearly enough money, so Bridgewater lent it to him—essentially transferring slivers of his ownership each year, building up a gigantic IOU to the hedge fund’s majority shareholder, who just so happened to be Dalio. Jensen’s debt skyrocketed as the value of Bridgewater rose. When Dalio sold a piece of the firm to the Texas teachers’ pension fund, not only his own stake was impacted. Since Bridgewater was now worth more, it made Jensen’s own tithe that year even more expensive as well. (kindle loc 2926)

This seems like a particularly bad deal, and poorly negotiated for his employees while enriching himself, hardly the "principled" man Dalio like to style himself. The various shenanigans surrounding sexual harassment was just as bad though perhaps all too common in the age of "me-too" revelations to raise too many eyebrows.

What surprised me in the book was that Dalio was perpetually pessimistic about the US economy. We know that over the last 50 years, the US stock market has been on an incredible bull run, and anyone betting consistently against it should have been wiped out, but apparently his algorithms worked even when he was pessimistic his funds were still doing well. His pessimistic outlook also meant that he loved autocrats:

Since the late 1980s, Dalio had been convinced that the United States was in an inextricable fall, not merely economically, but culturally. He saw U.S. politics as on a slow descent into unproductive squabbling, a journey that could end in nothing less than another civil war. At times, he called himself “an economic doctor,” with the prescription to fix all that. In place of U.S. hegemony, Dalio looked for a better blueprint abroad. He seemed particularly smitten with societies ruled by powerful autocrats. Thanks to Bridgewater’s long history of managing money for Singapore’s government-run funds, Dalio became friends with Lee Kuan Yew. The elder man, who served as Singapore’s prime minister for a staggering thirty-one years, was a controversial figure whose long tenure achieved stability for his nation at the cost of freedom. Lee governed through what was essentially one-party rule, restricting freedom of speech and dismissing the value of democracy...Over dinner at Dalio’s New York apartment shortly before the Singaporean leader’s death, the men discussed the best models among world leaders. Lee gave an unlikely answer in a posh Manhattan setting: Vladimir Putin. The Russian leader, Lee said, had stabilized Russia after the chaotic collapse of the Soviet Union. To Dalio, the analogy would have been seamless. He, too, had stabilized Bridgewater after a tumultuous stretch. (kindle loc 3476-3487)

 The book also covered the gross mismanagement of top talent that Dalio had hired for Bridgewater, including Jon Rubinstein and David Ferruci, both of which wanted nothing to do with Dalio's "Dot Connect" app but were roped into doing them anyway. Rubinstein in particular complained about Dalio's Principles, which wasn't the clean version he espoused in his book but an unwieldy, constantly changing giant ass book:

Once Dalio caught word that his new prized hire had struggled in boot camp, he asked for some time to chat. Rubinstein, cognizant of everything he’d learned about the Bridgewater founder’s love of raw honesty, decided to tell Dalio what was on his mind: “You’ve got three hundred and seventy-five Principles. Those aren’t principles. Toyota has fourteen principles. Amazon has fourteen principles. The Bible has ten. Three hundred and seventy-five can’t possibly be principles. They are an instruction manual.” (kindle loc 3723)

 The book covers the years of Bridgewater's underperformance perfunctorily --- there's an offhand suggestion that once computers became powerful enough and the rest of wall street started hiring up quants and computer scientists to do stock market analysis, Dalio's heuristics no longer offered a competitive edge and instead started to underperform the market. At this point apparently a lot of the money being managed is coming out of new rubes in totalitarian countries where Dalio has managed to cultivate sufficient contacts to have an information advantage with which to make investments, and even those aren't sufficient.

Take downs are fun to read, and this one was compelling. While Principles was good reading in theory, as usual in practice the implementation is more than a little tricky, and Dalio's success had nothing to do with his principles but a matter of being early enough and lucky enough to have money fall into his lap in big chunks (marry rich and be a good salesman). I'm much reminded of Google's promotion committees and how despite the high sounding principles only succeeded in making Google's promotion system even more political than the traditional manager-led promotion system. It's worth reading this book after reading Principles. It also explains why Dalio is such a China-supporter and all I can say is that the business/popular press loving to lionize businessman billionaires from Steve Jobs to Rockefeller to Elon Musk has a lot to do with the worst things happening to society today.

Recommended.

Review: Going Infinite

 I read Going Infinite expecting some of the trademark incisiveness and insight that Michael Lewis had brought to his other books. To my surprise, Michael Lewis, despite having unprecedented access to Sam Bankman-Fried, apparently swallows SBF at face value, hook, line and sinker.

For instance, right at the end of the book Lewis defends SBF, claiming that it's very likely that FTX was in fact solvent at the time of bankruptcy. That seems pretty unlikely --- if it had indeed been solvent, it would have been easy for FTX to cough up the money that its depositors wanted, rather than declaring bankruptcy. Molly White has an even better takedown of Michael Lewis's claims on her blog.

The entire book, in fact, therefore doesn't add up. We get a lot of claims that SBF made at face value, which isn't very satisfying, and maybe the prurient e-mails and notes between SBF and his one-time romantic partner Caroline Ellison. It's very clear that SBF has effectively told his story well --- but we've seen admissions in public that his belief in Effective Altruism (which still seems to me a crock) was basically a sympathy play --- it was his way into social acceptability for a person who's not very good at socializing with people.

Ultimately, what I'm surprised by was that his employees put up with his treatment of them for so long:

The Serum tokens Sam paid to employees like Friedberg appeared to be fetching $.33 at the time of his bankruptcy. Their true value was not as clear. The FTX employees’ Serum tokens were “locked”; the employees were forbidden from selling them until they became unlocked. The person who did the unlocking was Sam. Initially, the tokens were meant to be unlocked over the course of seven years, starting at the end of the first year. Employees could sell one-seventh of their Serum at the end of that first year, and another seventh at the end of each of the following years, until they’d sold it all. Soon after Serum’s creation, its price had skyrocketed. Sam clearly had not anticipated this. He now had all these employees who felt ridiculously rich. (At least in theory, the value of Dan Friedberg’s Serum stash peaked, in September 2021, at over $1 billion.) In Sam’s view, everyone at once became a lot less motivated to work fourteen-hour days. And so he did a very Sam thing: he changed the terms of the employees’ Serum. In the fine print of the employee Serum contract, he’d reserved for himself the right to extend Serum’s jail time, and he used it to lock up all employees’ Serum for seven years. Sam’s employees had always known that he preferred games in which the rules could change in the middle. They now understood that if he had changed the rules once, he might do it again. They became less enthusiastic about their Serum. “It was very unclear if you had it or if you didn’t have it,” said Ramnik, who had watched in irritation as Sam locked up a bunch of tokens that he’d bought with his own money on the open market before he joined FTX. “I guess you would know in seven years.” (kindle loc 3971)

This is the kind of thing that should have an employee thinking: "If he's willing to cheat me like this, what makes me think that he'll be honest with anyone else, customers, lawyers, or his donors and lenders?" It seems there were plenty of clues as to the fundamental dishonesty of Sam Bankman-Fried. It's just that Michael Lewis chose to ignore all of them, just like his employees did.

 

A Man for All Markets

A Man for All Markets is Ed Thorp's autobiography. It's a great book about how Thorp went from being a mathematician to being the first person to systematize and develop a system for beating blackjack, and then created the modern hedge fund. It's filled with great anecdotes:

We had been told that slide rules would be allowed for the first time this year but that they weren’t necessary. As an afterthought I brought along a ten-cent toy slide rule—all I felt I could afford—thinking I could always do a quick rough check of my calculations if I had any extra time. As I worked through the test I knew every answer. But then the last section of the test was distributed. This part of the exam required many more calculations than I could do by hand in the time allowed. My cheap tiny slide rule was worthless. Out came the full-sized well-machined slide rules all around me. Surprise! Slide rules were not merely optional—they were necessary for anyone who wanted to win. There was no credit given for showing the correct method, only credit for a numerical answer, to a specified level of “slide rule accuracy.” I was sickened by the realization I would likely not place high enough to get the scholarship I needed and unhappy with myself for not preparing by purchasing a hard-to-afford top-of-the-line slide rule. It seemed so unfair to convert a test about chemistry into one about slide rule arithmetic. Be that as it may, I set to calculating by hand as quickly as I could. In the end, I was only able to complete 873 of the entire exam’s 1,000 points’ worth of questions, so this was the most I could possibly score. I knew the top winner typically got 925 to 935, so I had no chance at first place. When my father picked me up I was forcing myself not to cry and could barely talk. In class Mr. Stump could see that I was chastened and obviously had done badly. We didn’t talk about it. I wrote the episode off to my own naïveté. But I did go out and buy the best slide rule I could afford. A couple of weeks after the test, Mr. Stump called me aside to tell me the results. My score was 869 points out of the 873 points I had answered. First place was far ahead at about 930, but second and third place were just a few points ahead of my fourth-place finish. With a good slide rule I could have been first. (Kindle Loc 716)

 And once again, Thorp emphasizes how important public universities like UC Berkeley is to the poor and under-privileged:

The scoring pattern of the chemistry exam was repeated, only this time I was first with 931 points. The second-place winner was fifty or sixty points behind. Surpassing the smug and privileged, I had first pick of the scholarships that were offered, wavering between Caltech and UC–Berkeley. Caltech, my first choice, offered full tuition, but I did not have an extra $2,000 per year for the dormitories and expenses. Pasadena was expensive and I knew of no place nearby within my budget. I simply couldn’t afford Caltech. My UC–Berkeley scholarship, the largest they then gave, was for $300 a year. Tuition, which was $70 a year, was covered separately for me by a scholarship for children of World War I veterans. Berkeley also had low-cost room and board just off campus. Cheaper yet was the Student Cooperative Housing Association, with room and board for $35 per month and four hours of work a week. When I picked Berkeley, I consoled myself with the hope that at least there would be plenty of girls and my social life might bloom. (Kindle Loc 831)

My kindle highlights page from the book is chock full of great stories:

 Most people I’ve met haven’t thought through the comparative values to them of time, money, and health. Think of the single worker who spends two hours commuting forty miles from hot and smoggy Riverside, California, to a $25-an-hour job in balmy Newport Beach. If the worker moves from his $1,200-a-month apartment in Riverside to a comparable $2,500-a-month apartment in Newport Beach, his rent increases by $1,300 a month but he avoids forty hours of commuting. If his time is worth $25 per hour he would save $1,000 ($25 × 40) each month. Add to that the cost of driving his car an extra sixteen hundred miles. If his economical car costs him 50 cents a mile or $800 a month to operate, living in Newport Beach and saving forty hours’ driving time each month makes him $500 better off ($1,000 + $800 − $1,300). In effect he earned just $12.50 per hour during his commute. Does our worker figure this out? I suspect he does not, because the extra $1,300 a month in rent he would pay in Newport Beach is a clearly visible cost that is painfully and regularly inflicted, whereas the cost of his car is less evident and can be put out of mind. (Kindle Loc 4724)

 What's amazing to me is that Thorp, unlike many of his cohorts who made tons of money at Wall Street, decided to fold up his company (which had been brought down not by poor investments, but by poor ethical decisions on the part of one of his partners):

Vivian and I would make the most of the one thing we could never have enough of—time together. Success on Wall Street was getting the most money. Success for us was having the best life. (Kindle Loc 3647)

Clearly, this is a man who's thought through everything, and made good decisions at every step of the way. I hope to get Bowen to read this book one day, because I think that not only does it explain why it's great to be good at math and thinking, but also that many of the most important decisions aren't just about probability and money, but about choosing the right people to partner with.

Recommended!

Travel Credit Cards Overview

This time, we traveled with the Capital One Quicksilver and Amazon Prime credit cards for travel use. Both offer no-fee international transactions, which is why I started using CapitalOne credit cards in the first place.

The Capital One credit card I've used before, but for 2018, there was a twist that made the card really useful when in Europe: NFC wireless built in! What's even better, for small amounts like what you'll typically buy in a grocery store, if you use the NFC chip, they don't make you sign for your purchase! This made me not even bother with Google Pay on my phone. All cards should have this feature.

The Amazon Prime credit card was new to me for international travel. I think I learned not to trust credit cards that claim no-fee international transactions, since you won't know about any hidden fees until you get home and check your purchases. I was sparing with it, but I can confirm indeed that it has no fees for international transactions, now that checked my statement. Unfortunately, it doesn't have an NFC chip.

One trick you want to use is to set a pin on your credit card before you travel. This takes a month or so, on occasion, but what it does is to allow you to use your credit card to buy train tickets, where the machine demands a pin. I did this with the Capital One card, and it works well. (No, the train ticket machines don't take NFC)

The Amazon Prime card offers quite a bit more benefits than the Capital One card. The lack of NFC might be worked around by you setting it to be your default card on Google Pay. But I didn't really try Google Pay in Europe this time. That'll be an experiment for future travel. I'll probably try to use the Amazon Prime card a lot more next time, now that I'm confident that the "no-fee" clause is true.

Wealthfront's Customer Service

Recently, someone pointed me to the wired article about the risk parity fund that Wealthfront introduced and asked me why I wasn't even concerned enough to think about it? The honest answer is that Wealthfront has great credibility with me because of the way they handled customer issues in the past, so when I saw the risk parity e-mail I just said to myself, "This is Andy Rachleff introducing something cool, and I don't have to think about it."

Here's what happened 2 years ago, which has made my wife and I Wealthfront investors, instead of just customers who got a really good deal. Turbotax had indicated that our tax bill would be significantly reduced if we contributed to our IRAs. My IRA was with Vanguard, so I just did that. My wife's IRA was with Wealthfront. She initiated the process, but Wealthfront sent a confirmation e-mail that required that she click on a link to complete the process. Since we were traveling, she ignored the e-mail and forgot about it. The result was that her IRA contribution didn't go through and we were forced to file an amended return.

When Wealthfront found out about this (which happened to other customers, not just us), they were very apologetic. We got phone calls asking how they could make it up to us. They offered other customers a permanent waiver from fees, but since we already had that, their solution was to ask if we'd like to get stock options in Wealthfront instead. Yes, at this point, you're probably thinking about the irony that Wealthfront had screwed up, and the net result was that we ended up buying their stock and giving them money, but if you know anything about me and my wife, you know that it takes a very special company (with exceptional customer service) to get us to put money in.

Nevertheless, since I got prodded by a friend of mine, I contacted Andy Rachleff to ask about his response to the wired article. His response impressed me: Risk Parity is essentially taking academic research and bringing it to the masses. The idea is that lower volatility securities have higher risk-adjusted returns in the long run. The reason why bond funds have always returned lower is because they're much lower risk. So how would you take advantage of this? The answer is to use leverage: borrow money to buy bonds, multiplying the risk (and the returns). If you know me, you know that I'm allergic to borrowing money, but in this case, what's happening is that Wealthfront is borrowing at wholesale rates and the yield on the bonds exceed the interest the Risk Parity fund is paying, so there's no risk of being forced to sell if the bond market crashed. The expected return on this maneuver is high enough that at the 20% cap Wealthfront expects your overall returns to improve. The reason for the 20% cap is that tax loss harvesting is a big feature in a Wealthfront account, and there's no reasonable alternative for Wealthfront's Risk Parity fund to tax loss harvest into.

Wealthfront just announced yesterday that they're cutting expense ratios on the Risk Parity fund in half (to 0.25% from 0.5%), to avoid accusations that they're using the Risk Parity fund as a hidden profit center. The expectation is that cost savings from increased scale would also lead to further reductions in expense ratios in the future, just as Vanguard fund has done.

So, in response to people who're asking the question: would I still recommend Wealthfront? My answer is: "Yes, whole heartedly." I'm happy to be both a Wealthfront investor and customer. They've been very good about both fixing mistakes, and introducing features in their products that make money for their customers. I intend on adding more assets to my Wealthfront account in the future.

Excellent Customer Service: 2 Great Examples

Most of the time whenever I interact with customer service, I have my expectations set relatively low. From the "high call volume" phone waiting queue to the "I'm sorry but that's not our policy" scripted lines, I'm frequently frustrated, left on hold, and have calls dropped. In fact, one reason why I prefer using a Bluetooth headset to make phone calls is because at least I can have my hands free to do other stuff while listening to "please hold for our next available representative." As such, when I do get great customer service, I have to call out the great companies that provide it.

My first example is Wealthfront. They have what I consider to be an excellent product. Recently, they had a screw up with a contribution. This in itself was unusual, what really was excellent was that they proactively called us to tell us about the screw up. This is how you handle a screw up with a customer: "we screwed up, it's our fault, we take full responsibility for it, and we want to make it right." That in itself is unusual. What followed next was that they offered to give us a lifetime fee waiver. Now we already have a lifetime fee waiver, and upon telling the customer rep that, they were surprised, but treated it as a challenge rather than an obnoxious obstacle. My wife and I were pleased by their resolution of the matter and now we're not just customers but also shareholders in the company. If you're using a human financial advisor, unless it's Vanguard, I highly recommend that you consider switching.

My second example today is Garmin. Garmin has an undeservedly bad reputation amongst loud-mouthed internet forum posters. Part of it is justified: if you're the kind of person who buys the latest gadget, Garmin's new products almost always have teething problems. But if you're a mid to late adopter, buying products even as early as 3 months after introduction, their products outperform the competition and now I'll add customer service to the list of their advantages. Recently, my vivoactive stopped charging. I noted that I was out of warranty, but called them anyway. The customer service rep noted that I was out of warranty, but immediately said, "It's only been by a couple of months, so we're going to extend your warranty." We established that it really wasn't charging, and she offered to exchange the unit. I noted that it was equally likely (if not more likely) to be the charging cable that was faulty, and she immediately sent out a new charging cable. When both the charging cable and new unit arrived, it clearly was the charging cable, so in the future if this happens again (I'll admit to having abused the old charging cable quite a bit, so it's unlikely this will happen to you), I'll just buy a new charging cable.

When I encounter particularly poor customer service, I don't hesitate to call it out, but both Wealthfront and Garmin deserve to be called out for excellence in customer service. Only Amazon regularly exceeds my expectations this way. In this age of machine learning and automated phone responses, the human touch may turn out to be the only way to delight customers and stand out.

Review: The Opposite of Spoiled

I checked out The Opposite of Spoiled hoping for practical tips on how to teach children about money. I got more and less than what I bargained for.

In particular, the people this book are written for aren't anywhere close to my profile. These parents are white, privileged, have ridiculous amounts of money, and don't spend time with their kids. If you're Asian, come from an unprivileged background, and don't take private jets to fly to your vacations, you're probably in no danger of needing to read this book whatsoever. To be fair, I've met a large number of people who meet the above category, so this is not to say that the book is useless. It's probably very useful for white rich people in the 1%. It just makes no sense to read or follow its prescription if you're not.

Here are a few examples: the book describes a common problem of over-parenting as parents waiting in line outside summer camps rushing to their kids with all sorts of goodies, seeking to outdo each other. These summer camps seem cushy compared to the kind of trips I've already taken my 3 year old on. I can't imagine that I'd ever worry that my son couldn't make it a few days without his iPad. He's made weeks without any kind of electronic device. I imagine parents who have no idea what backcountry camping is would have the kinds of challenges described in this book.

Another example: the book presumes that you want to teach generosity to your kids. If you come from an immigrant background, especially if you were brought up in Asia, you learned to value society over the individual. Your problem isn't teaching your kids how to be generous and nice, Your problem is teaching kids how to be sufficiently selfish that they wouldn't get stepped on in the extremely competitive (by comparison) American society. I remember being horrified by story after story ex-Googlers told me about political behavior from my peers all in the name of getting ahead. Most of those stories involved people of privileged stepping on H1B holders or taking advantage of people who valued societal niceties over every man for himself. (I myself have had people tell me that it was my biggest barrier to succeeding)

What are my recommendations? If you're a white person, please read this book and apply it to your kids. If you're Asian, you'd do far better by pretending this book doesn't exist. And don't worry about teaching finance to your kids. Just by being Asian your example would probably be sufficient.

Review: Being Mortal: Medicine and What Matters in the End

Being Mortal is Atul Gawande's book about end-of-life care. It discusses the history of end-of-life care, and how the current nursing home environment came about, not as a natural evolution of the poor houses of the past, but as an extension of the hospital. This explains the inherent conflict between providing good care leading to happier tenants, and satisfying safety requirements and reducing risk.

What's interesting by far about the book is it's criticism of nursing home care: fundamentally, eliminating risk is anthetical to happiness in a tenant/patient. By eliminating the possibility of the patient doing what he wants when he wants to, the patient is infantilized, and ironically, the result is poorer outcomes, in addition to the reduced quality of life the regimented approach ensues.

The alternatives are considerably different: various assisted-living philosophies attempt to ensure the tenant's independence while reducing risk by ensuring staff is on hand as called upon, rather than being intrusive. The problem is that all it took was a few bad apples and regulatory apparatus will then take over and ensure that safety is the highest priority, rather than patient happiness.

Gawande ties it all together with his own experience as a practitioner: he describes several patients, and touchingly, his own father's death (not even neglecting the detail of acquiring the Giardia parasite while scattering his father's ashes on the Ganges) By doing so, he reveals something important: it's critical to have the important conversations up front: how heroic do you want the interventions to be, and what's acceptable as an outcome (and by corollary, what's not!). For instance, there's an example of a patient whose father said, "As long as I can watch football on TV, I'm good." which surprised the heck out of his daughter.

The book is sadly lacking in statistics, as well as detailed cost analysis. It does, however, mention several important details: hospice care, for instance, is intended to optimize the day to day life, rather than potential recovery as opposed to the standard heroic life-extension attempts today. However, it turns out that hospice care usually also leads to as long or longer lifespan as a result: it turns out that if your day to day life isn't hell, you actually live longer even if heroic medical interventions aren't exerted:

The result: those who saw a palliative care specialist stopped chemotherapy sooner, entered hospice far earlier, experienced less suffering at the end of their lives— and they lived 25 percent longer. In other words, our decision making in medicine has failed so spectacularly that we have reached the point of actively inflicting harm on patients rather than confronting the subject of mortality. If end-of-life discussions were an experimental drug, the FDA would approve it.(Kindle Loc. 2504-7)

By far the biggest problem, it appears, is that medical professionals have to be able, trained, and willing to have these difficult discussions with patients. In one example, Gawande observes a physician saying, "Well, a good outcome for this patient as a result of this procedure would be an additional year or two." At the same, time, the patient was thinking in terms of getting an additional decade or two of life for the same procedure. Without a thorough and honest exploration of what each option means, it is no wonder that so many patients get railroaded into heroic interventions at the expense of quality of life and time spent with their loved ones:

People die only once. They have no experience to draw on. They need doctors and nurses who are willing to have the hard discussions and say what they have seen, who will help people prepare for what is to come—and escape a warehoused oblivion that few really want.(Kindle Loc. 2655-57)

  In any case, despite my mild criticism of the book above, this has so far been the best book I've read all year. If you have aging parents or are yourself aging, this book is a must-read. Highly Recommended.

Review: How to Fail At Almost Everything and Still Win Big

Authors are strange and irrational creatures. Ask any author with multiple books out which book they wrote they like the most, and they almost invariably point at their worst selling book. For instance, Douglas Adams was very fond of his one non-fiction book, Last Chance to See. I myself am not immune to this, and despite every other book of mine being much more successful, and having been less work to write, Independent Cycle Touring is still easily my favorite.

How to Fail At Almost Everything and Still Win Big, is by Scott Adams' account, his least successful book. Therefore he spends every other blog post touting the book despite its apparent failure. I succumbed to his marketing spiel, and of course, checked it out of the library, because I'm a cheap skate and I work that way.

Part autobiography, the book is exceedingly easy to read. I'll summarize a few main points:

1. Processes and Systems are more important than goals.
2. Affirmation works (surprisingly well), but he has no idea why.
3. To be able to help others or contribute to society, you need to take care of yourself. That means that the following should be your highest priority: exercise, diet, and optimizing your personal energy level.
4. Success depends very much on luck. It's very difficult to become successful by being world class at one or two skills. You have much better chances by learning multiple skills, and being the only person who can combine those skills in a package.
5. Certain skills are particularly important: public speaking, business writing, a knowledge of practical, applied psychology, understanding basic technology, social skills, proper voice technique, good grammar, and basic accounting.
6. You can reprogram your mind to do anything. Humans are not rational, and if you think of your brain as being subject to being able to be reprogrammed, you'll be able to do things that others routinely find difficult.
7. Drink coffee. It lets you regulate your energy cycle deliberately, has many health benefits, (chiefest of which is that it puts you in the mood for exercise) and few side effects even if you become addicted.

The most comparable I've read on this topic is John T Reed's Succeeding, which I enjoyed. This book is much cheaper, but it's also much less practical when it comes to dating methods, for instance, or risk analysis, but they both come out on the same things, which is that process and systems are critically important.

The biggest weakness of Adams' book is that he's a smart guy, but he doesn't point out how important geographical location was, despite his success depending entirely on it. He mentioned moving to the Bay Area early on in his career, and his resulting career couldn't have succeeded without that move. You should always move to a location that's appropriate to your talents as much as possible.

In any case, Reed's book is much better, more detailed, and more likely to be of practical use to the average person, but Adams' book is funnier, cheaper, and probably more accessible. In any case, the book is smart and well written and worth your time.

Recommended.

Review: The Flash Boys

Books about Wall Street have a way of being incredibly depressing. For instance, Elizabeth Warren's story about fighting Wall Street has a main theme, which is, "Bank meets consumer, Bank screws consumer, ad nauseum." I'm happy to report that The Flash Boys is an exception to this rule.

The book is about high frequency trading: the practice of front-running investor's trades electronically in order to capture the bid-ask spread. It's an obnoxious practice, but generates so much profit that the firms doing so are willing to spend hundreds of millions relocating servers to be closer to the exchanges. Obviously those folks are the villains of the book.

But the book does have a hero, IEX, co-founded by Brad Katsuyama. Lewis follows the discovery (by Katsuyama, amongst others) of the existence of HFT, the desire to build an exchange immune to predation through HFT, and the creation of IEX and its team. The story is told well, as compelling as any thriller you might have read, and I found myself turning its pages furiously. It's also a short read.

I tried to think of ways IEX was built that might make them prone to the kinds of conflicts of interests that have plagued other exchanges, but came up short, so I think Lewis has done the story justice, rather than just acted as PR agent for IEX.

Recommended.

Hat tip to Larry Hosken for pointing me at this book.

Vanguard's Unique Corporate Structure

One thing I've come to realize over and over again, is that very few people understand what makes Vanguard such a unique company. Some might even be confused by my referring to both Vanguard and TIAA-CREF as non-profits, which is both strange and unfamiliar given that most people think of non-profits as charitable institutions, while Vanguard is clearly not one.

What makes Vanguard unique is the ownership structure. A traditional financial institution such as Fidelity or Charles Schwab or any of the traditional Wall Street banks and investment banks is a privately owned company that manages mutual funds or other financial services for its customers. This leads to a conflict of interest: the owners of Fidelity, for instance, make more money if it charges its customers more. That means that Fidelity becomes more profitable, the higher the expenses it can charge its customers. As you can imagine, Fidelity's expense ratios (other than a few funds where it competes directly with Vanguard) are quite high as a result.

Vanguard the operating company, however, is owned by the mutual funds it operates. In other words, the mutual funds own and direct the operating company. With this ownership structure, there's no conflict of interest between the customer of a Vanguard fund and Vanguard itself: the lower the expenses Vanguard manage to operate at, the more profitable the mutual funds are, and better off the Vanguard customer is.

Now, this is by no means a panacea. For instance, you can imagine a corrupt situation where Vanguard's operating firm's officers serve as the officers of its mutual funds, and so they vote their own compensation packages sky high while hurting Vanguard's customers. There's no guarantee that this can't happen, but given that large financial institutions with no relationship to Vanguard's officers get to vet and do due diligence of Vanguard's funds before they invest, there's good reason to believe that the market will serve as an adequate watchdog and prevent this from happening.

The result of this ownership structure difference is substantial: Vanguard's dramatically dropped its expenses for the vast majority of its customers over its life, and it continues to do so today. And if you ask me why I'm an unabashed Vanguard fan (over Fidelity, Schwab, or even Wealthfront), I'd point to this structure as being unique and unreplicated in the financial industry.

The Siren Song of Real Estate

I'm constantly astounded by how frequently people tout real estate as a great investment. Take a look at this example from Quora, for instance:

Buy a single-family, 3 bedroom rental for $180,000. Rent = $1,200/month. That's about 7% rate of return on your investment. Here's the good news: after depreciation, you net income is practically zero (on paper).

Where do I begin? First of all, don't forget maintenance, insurance, and taxes on the home!  If there's a HOA, add that monthly fee in there as well. On average maintenance costs about 1% a year, and property taxes eat another 1%. Add to that insurance, which is another 2.5%. Now that's $4,500 / year.

There's also costs of acquiring a renter, as well as the possibility of not being able to rent out a house for a while. (If your 3 bedroom house rents for $1200/month, it's not in a strong market like the Bay Area) John T Reed uses a 95% vacancy rate as standard, which means that you lose about 2 weeks of rental income a year due to moving people in and out.

So now your numbers look like this: $13,846 in revenue, $4500 in costs, which is $9346, or a 5% return, give or take a bit. But you also paid a real estate agent about $5400 to buy the home, and you'd have to pay the same to sell it, assuming no appreciation. (Typically real estate appreciates 0.4% a year after inflation, and if you're getting a house for $180,000, it's not in a high growth area like the San Francisco Area)

Note that the above numbers from Quora are doctor'd! In other words, good luck buying a house for $180,000 that can rent for $1,200/month, which would imply a price to rent ratio of 12.5. In most parts of the country, price to rent ratio is 15, which means that you'd have to pay $216,000 for that same house. Your property taxes, insurance, and maintenance costs go up proportionately, and you're down to less than 4% return, even assuming you didn't pay brokerage fees for buying the house.

What about depreciation? Well, if you depreciate the property, you have to back that out when you sell, so your capital gains would register that much higher.

(Just in case you were wondering, the price to rent ratio in the Bay Area is currently at least 20, probably approaching 25: it really isn't a good place to buy a property to rent)

Are there any mitigating factors? Yes. If you live in the house for 3 out of the past 5 years, capital gains are exempt from taxes. So if you moved every 4 years and bought a new house each time, and real estate kept going up, you could come out ahead with respect to housing versus saying, buying an indexed fund. But you hardly see any one except John T Reed telling you to do that. Most people, especially families, don't like moving that often.

If you can do exchanges, then trading up is essentially tax free, enabling you to defer paying taxes. That's also nice. But you'd be tying up your wealth in increasingly large amounts of real estate as you do so.

The big reason why most people think real estate makes a huge amount of money is because of personal experience. They put 20% down on a house, watch the house go up in value, and walk out with a ton of money due to the use of leverage. As folks found out when the housing bubble crashes, leverage hurts you a lot as well when the market goes down.

There's no free lunch in investing. Unfortunately, there are lots of people who like to tell you that there is, and they'll make money selling you books, seminars, and other content doing so. Real estate investing has just as many people like that as the financial services industry, so if something you hear (or read) sounds too good to be true, it probably is.

Exploitation

Google, Intel and Apple are appealing Lucy Koh's rejection of their settlement about the anti-poaching case. It's very hard to get sides that don't want to sue each other to sue each other, so my expectations are that the court of appeals will reject Koh's decision.

Many of my former colleagues have said something like "I wasn't really exploited. I'm going to donate my money from the settlement anyway, so it doesn't matter how much it is." This tears me up.  It tears me up especially since the kind of people who say that tend to be white, privileged, and have never really had to struggle to make a living.

When I was 20 and a struggling student (yes, I actually did receive Pell grants), I had to work 2 jobs simultaneously while carrying a full time load to avoid having to take out crushing amounts of student loans. I had a deep aversion to carrying debt at that time and I still do now. I worked for a tiny company in Berkeley called Geoworks over the summer full time as an intern. Geoworks was your prototypical technology startup, and had lots of cool projects, including the idea that you could work on whatever you want and no manager would stop you provided you got your main job time. Of course, that meant that many of us worked 80-100 hour weeks for fun. (Google called this 20% time, Geoworks called it "anarchy time") In fact, the predecessor for gtags was a tool I wrote during anarchy time for Geoworks to browse and navigate the multi-million lines of assembly that encompassed GEOS. For all that, I was getting paid a nominal $15 an hour, but working way more than the 40 hours a week. I think I might have clocked 80 hours a week normally.

At the end of the summer, I was due to go back to school. The management team at Geoworks took me aside and said, "You'll be working fewer hours, and so as a result, we're going to cut your hourly rate because you will not be as focused on your work as you were when you were full time." They proposed to cut my pay to $12 an hour, in addition to giving me only 20 hours a week. I was by no means someone they were trying to get rid of, since they would try to hire me again next year as a full time engineer after I graduated. I was hopping mad. I quit and worked as an undergraduate TA at school instead, reasoning that if I was going to be exploited (Berkeley only paid $10/hour), I'd rather be exploited by a non-profit and help my fellow students and avoid the walk to downtown Berkeley and stay on campus instead.

Years later, other former interns from Geoworks would thank me for my actions, because after seeing someone they thought was loyal walk out over that 20% hourly rate cut, management at Geoworks backed off on that policy.

What relevance does this have today? Back then, tech workers were plentiful and companies didn't need as many. There wasn't as much competition back then as there are now for workers. You'd think that, but you'd be wrong. Just a few years back, one of Google's early SREs left Google and joined Facebook, based on something very similar to my story above. After that event, Google gave everyone on his team a raise. Was that competition helping out? Or was it simply because Facebook refused to join the cartel that Google, Intel, Apple, Adobe, and several others put together? Regardless of how you feel about Facebook as an employer or product, engineers in the valley owe a huge favor to Facebook walking in and breaking the cartel and raising wages as a result.

Here's the thing: Google and Apple have engineers that are the strongest in the industry. You would think that it would be impossible to exploit such an incredibly valued bunch of folks, yet these large corporations got together and did it, and successfully got away with it, getting a slap-on-the-wrist settlement from the government. If these companies get away with murder when it comes to Google-class engineers, what do you think happens to the women and minority in the profession who aren't in the top tier? That marginal worker on average discovers that the low pay and long hours common in the profession does not pay enough to keep him or her working in software development. As a result, the average software career is much shorter than careers in other engineering professions, allowing the industry to claim a shortage.

I don't care if you personally don't need the money from the settlement (I don't, either). But when exploitation of workers happen, call it out. Don't sit back and behave like a spectator: let everyone knows how unfair it is, and how it shouldn't be allowed to happen. By doing so you're not just helping yourself, you're also helping engineers that aren't working at your tier. Otherwise, all the noise about trying to get more women and minorities into the profession is just noise; until you can get fairness in the workplace for the top tier workers, you don't have a prayer of making it attractive for the marginal tech worker or helping those who aren't in the 1%.

Review: Capital in the Twenty-First Century

Capital in the Twenty-First Century is Thomas Piketty's magnum opus about the future of capitalism and the implications thereof. It is by far and away the best book I've read this year, and I doubt if I'll read a better book in this decade. It's a combination of economics, political economy, history, literature analysis (of Jane Austen and Honore Balzac no less) and big-data analysis that had me getting up early to read it. In my younger days, I would have devoured this book non-stop in a matter of days, ignoring food, sleep, and work. It is more exciting than any combination of science fiction novels, and in many ways fulfills the idea of economics as psychohistory.

The central premise of the book is the inequality r > g. Through human history, while growth rates have usually been around 1%, the return on capital has usually been around 5% (in real terms, not nominal terms). You might question this 5% number as contradicting Bernstein's 2% number. Note that Bernstein's numbers includes major catastrophes, such as the world wars wiping out most assets in Europe. From a personal finance point of view, such events usually mean that you care a lot more about staying alive than your portfolio! The implications on wealth accumulation is fairly straightforward: if you can accumulate capital such that you can live on less than 5% over a long period of time, you can reinvest the remainder of your capital income and grow well above the growth rate of the economy, leaving you not only with increasing assets, but also freeing you and your heirs from ever having to work for an income ever again. In the extreme case (let's say you're Bill Gates), you can live on 0.01% of your income from capital and essentially reinvest all the proceeds, creating dynastic level wealth. The Hiltons, Kennedys, Rockefellers, and Kochs are of course in this category.

Wait a minute, you say, isn't the world GDP growth more than 3%? Isn't China growing at 7-8%? This is where historical data comes in. Piketty provides convincing evidence that these numbers can only occur because of (1) population growth, and (2) catchup with the modern economies. In other words, Europe could only grow at 6-8% a year until it caught up with the USA at the frontier of technology and infrastructure, at which point it devolved down to 1-1.5% growth. The same happened to Japan, and will happen to China. It's reasonable to expect the world to degenerate to that case eventually, but the developed world is already there.

Even more impressively, Piketty has current data. This data in particular, shows that the top 1% in Europe and USA already own more than 70% of the capital assets in their respective economic arenas. Even worse, there's reasonable evidence that because of the existence of tax havens, these estimates are low. Piketty analyzes total capital known to be in existence, and reveals that the world owes more money than exists in developed country accounts. The remainder of the dark capital exists in tax havens and is likely to be around 10% of global wealth.

How bad can things get? Here, Piketty turns to history for data and to literature to make it real. This section of the book is impressive and amazing to read. During the Gilded Age (called Belle Epoque in the book), the wealthy commanded 90% of the capital in their respective countries. Fully half of the population (then and now) owned essentially nothing or had a negative net-worth, and there was no middle class. There was effectively no inflation, which explained why Austen and Balzac would provide numbers in terms of income for the characters in their novels and expect readers to understand what situations each character was in. Worse, there was no way for anyone to get ahead by hard work or education: even judges could at most make 5 to 7 times the average income, compared to the wealthy heirs and heiresses who would have 30 to 60 times the average income from the capital they inherited. Hence, the plots of those novels always involved marrying someone so wealthy that they could provide a dignified existence (meaning that they could hire enough servants to take care of the needs of daily living, given the non-existence of refrigeration, cars, etc).

Lest you think that this state of affairs could only occur because of a stagnant technology, Piketty reminds the reader that automobiles, steam engines, etc. were all invented during this period. It was hardly a period of stagnation. Yet because all new technology required capital, the inventors didn't make off with the lion's share of the profits.

So how did the situation change? Was it the progressive income tax? Was it the introduction of inflation? The answer was that it took 2 world wars to essentially destroy most of the existing capital stock in Europe in order for a more egalitarian post-war generation to exist. This essentially created a middle class that owned about 40% of the wealth and consisted of 40% of the population. 50% of the population continued to own no property, while the top 10% owns 60% of the wealth. In the U.S., punitive taxation levels of 90% kept inequality low, essentially keeping the American middle class from suffering the same fate. Piketty points out that the 90% tax rate was hardly ever paid. Instead, what it did was to keep executives (who essentially set their own pay) from asking for compensation at that level. When those tax rates were dismantled in the 1980s, CEO and other executive compensation sky-rocketed in response.

So how does the world look going forward? It looks grim. We are currently in a situation where in the US and Europe, capital from inheritances and capital from savings through work average about 50%. By 2050, if things don't change, we could easily see a return to inequality levels seen during the Gilded Age: most high net-worth households will be those who are inherited, and once again, your path to success would lie mostly in marrying rich rather than hard work and entrepreneurship. The dystopia of Blade Runner or Elysium never looked more likely than through Piketty's statistics. To balance that out a bit, Piketty points out that the European and US welfare states do cushion the blow somewhat: elderly poverty is down substantially since social security was introduced, and the European safety nets are even more generous. Of course, there's no shortage of the usual suspects wanting to tear that down...

Is there any possibility of change? Piketty proposes a global tax on capital, essentially a wealth tax. This is by far the most disappointing section of the book, not because such an idea wouldn't work, but because the political climate just wouldn't allow it. Furthermore, he works in lots of other issues that have very little with inequality and other topics covered by the book. For instance, he covers ways to pay down the national debts of various countries with a one-time exceptional tax. Since Piketty is French, he spends a lot of time discussing the Euro and the need for Eurozone cooperation and sanctions against tax havens, which is an international problem.

But seriously, that's a small nit on the book. I haven't even covered many of the side-topics that Piketty covers in the book. For instance, there's a huge discussion of slavery in the US in the antebellum South. This was a tour de force, as Piketty shows how much wealth slaveholders had: essentially, the northern US states were poor compared with old Europe, but the southern US states were wealthier, and of course, with a correspondingly higher wealth inequality. There cannot be more impoverishment than the inability to own even your own labor, and Piketty's statistics and graphs show the benefit of being on the other side of that equation in stark relief.

Piketty also discusses the American education system in contrast with the European systems, and how elite American colleges perpetuate the inequality that already exist in society: the majority of their incoming students come from the top quartile of society. He does point out the advantages of charging insanely high tuition, so you do get something for your money. Nevertheless, this goes a long way towards understanding why elite American colleges' acceptance tests seem very similar to the old-school European finishing school, complete with piano-playing and other tests of altruism and "leadership." They essentially have not drifted too far from those original prototypical elite institutions.

Finally, is there anything practical you can learn about personal finance in this economics book? The answer is yes. The first of which is that real-estate is a mug's game. Today's real-estate yields about 3-4%. Why so low when all other capital earns 4-5% real returns? The answer: real-estate is the only capital today subject to Piketty's wealth-tax. That wealth tax seems small: 1-1.5% of property value per year. But since it's levied every year, it imposes a drag on performance that's much higher than the capital gains tax, which are the subject of inter-state competition and hence tends towards zero over the long term. Piketty points out that the higher up the wealth ladder you go, the lower the proportion of real estate owned in the portfolio because of these characteristics. In other words, it's better to be equity-heavy and house poor than equity-light and house rich. The other lessons are fairly obvious: you want to have the lowest costs possible (both in investment costs and living expenses) so that your capital has the highest chance to compound. The bigger your portfolio, the faster the money will grow: Piketty points out that there's no difference in performance between Bill Gate's portfolio and Liliane Bettencourt's portfolio, even though one was a brilliant entrepreneur and the other is the heiress of the L'Oreal fortune. Capital is indifferent as to how you came by it. Furthermore, the largest portfolios grow the fastest. The elite university endowments for instance, grow at 8-10% a year, since once you get past a certain size you can take advantage not only of relatively expensive wealth managers through economies of scale, but you also have the ability to buy illiquid assets that cannot be easily sold and hence command a risk premium.

In the writing of this review, my biggest fear is that I haven't convinced you that you must read this book. Not only does it give you tools with which to analyze the world (and Jane Austen's novels --- you might even be able to avoid having to read them at all, since Piketty does such a great job of picking out the essentials), it also gives you the context of why we are still feeling the effects of world war 2, 70 years after the event.

Highly recommended. Pay whatever price you have to, ignore whatever pressing assignments you have to, read this book. It is that good, and whether or not you disagree with the politics, there's plenty in here for you to exercise your intellectual muscle on. Go to it.