“Philosophy and theology give you the perfect background for investing. To succeed at investing, you need a philosophy. Then you’ve got to pray like hell.”
Shelby Collum Davis
When Low Risk Means High Risk | Morningstar
John Rekenthaler's article "When Low-Risk Means High Risk," published on Morningstar, critically examines the paradox where traditionally low-risk financial investments have resulted in higher risk due to prolonged low interest rates. Rekenthaler highlights the dilemma facing investors using Treasury bills as a benchmark, pointing out that despite their conservative label, many funds that benchmark against Treasury bills have failed to deliver satisfactory returns when adjusted for inflation.
The article analyzes 169 mutual funds and ETFs that use a Treasury bill index as their benchmark. Despite their conservative marketing, these funds have underperformed, with only a few exceeding a 5% annualized return over the past decade. Rekenthaler argues that the complexity and high costs of these funds' strategies further erode potential gains.
The article also discusses the implications of low-risk investments in a low-interest-rate environment. Rekenthaler uses data to show that no investment category broke the general "no risk, no return pattern." He notes that many investment categories, particularly those seen as safe or as portfolio hedges, have posted real losses over the time analyzed.
Key Points
Benchmarking Issue: Many funds using Treasury bills as benchmarks fail to justify their conservative stance, as they neither mimic the low volatility of T-bills nor offer competitive returns.
Performance Analysis: Only a small fraction of the funds exceeded a 5% return, and even these funds did not align with the low-risk profile of their benchmarks.
Cost and Strategy: The funds in question typically have high expense ratios and employ complex strategies that do not necessarily lead to better investor outcomes.
Risk vs. Return: The data presented shows a clear correlation between risk and return, challenging funds that claim low risk but fail to offer adequate returns, especially when adjusted for inflation.
Market Trends: The persistent low interest rates have diminished the returns on traditionally low-risk investments like government bonds and certain defensive investment strategies.
Key Quotes
"Every investment has a higher expected return than Treasury bills because every investment is riskier. Thus, the test is rigged."
"No investment path appeared to work."
"Retreating to bonds, cash, and investment alternatives was psychologically comforting after the 2008 global financial crisis... But what feels good is not necessarily what is right."
Why It Matters
Rekenthaler's insights are crucial for several reasons:
Investor Guidance: The analysis provides a stark reminder of the complexities of the modern financial landscape, where traditional notions of risk are being upended. It serves as a guide for investors to rethink their risk assessment and investment strategies.
Policy Implications: The findings highlight potential areas for regulatory and fiscal policy adjustments, particularly concerning the marketing and transparency of financial products claiming to be low-risk.
Educational Value: By dissecting the performance of these funds and the overall investment environment, the article educates readers about the inherent risks of conservative investment strategies in a low-rate economic environment.
Shift in Investment Paradigm: The discussion prompts a reevaluation of investment principles, pushing for a more dynamic understanding of risk, especially for retirees and other conservative investors who rely on these types of investments for income and stability.
Rekenthaler's commentary underscores the importance of aligning investment strategies with the economic realities of the time, advocating for a more informed and nuanced approach to investing, particularly in a landscape altered by prolonged low interest rates.
Finternet: technology vision and architecture
"Finternet: Technology Vision and Architecture" is a comprehensive document that outlines a visionary framework for integrating financial systems on a global scale, akin to the structure and principles of the Internet. Authored by Nandan Nilekani, Pramod Varma, and Siddharth Shetty, the paper proposes the Finternet as a user-centric, unified, and universally accessible digital infrastructure to revolutionize financial interactions across diverse economic and social landscapes.
The document begins with an abstract that sets the stage for a financial system designed around user centricity, universality, and unification. It emphasizes the need for interoperability and scalability within this system to ensure seamless transactions across different platforms and legal frameworks, promoting financial inclusivity and innovation.
The main body of the document is structured around several key areas:
Current Financial System Challenges: Highlighting high transaction costs, vendor lock-in, and non-interoperable systems that increase operational expenses and complexity.
Experiences from Building at Societal Scale: Discusses the role of Digital Public Infrastructure (DPI) in driving large-scale societal transformations and its successful implementation in various countries.
The Three U's - User-centric, Unified, and Universal Design Principles: Each aspect is discussed in detail, advocating for a system that is open and accessible to all yet customizable to meet diverse global needs.
Technology Vision and Key Technical Characteristics: This section provides a detailed architecture outline, emphasizing a decentralized, scalable, and interoperable framework with strong security measures.
Unified Interledger Protocol (UILP) is designed to ensure interoperability and secure transactions across different financial systems.
Applications and Use-Cases: It presents potential applications of the Finternet in various sectors, highlighting its capacity to empower businesses and individuals economically.
The document concludes by stressing the significant potential impact of the Finternet, which is capable of influencing billions of people and businesses globally. It calls for a collective effort to realize this vision, leveraging technology to create a more inclusive and efficient financial future.
Key Points
Economic Inclusion and Growth
Finternet aims to democratize access to financial services, ensuring that even those in remote or underserved regions can participate in the global economy. This inclusivity can lead to a surge in economic activities as more people and businesses access necessary financial tools for growth and innovation. By reducing the barriers to entry, Finternet could help unleash the entrepreneurial potential of millions, contributing to economic diversification and resilience worldwide.
Enhanced Efficiency and Reduced Costs
Current financial systems are often criticized for being inefficient and costly, with high fees for international transactions, slow processing times, and cumbersome compliance procedures. Finternet's architecture promises to streamline these processes, facilitating quicker, cheaper, and more transparent transactions. Technologies like the Unified Interledger Protocol (UILP) ensure systems can communicate seamlessly, reducing the friction that typically inflates costs and delays.
Security and Trust
Building trust and security in financial transactions at the infrastructure level is pivotal. By designing the system to be "safe by design," Finternet intends to embed security, privacy, and compliance into the core functionality of the financial services ecosystem. This approach helps prevent fraud, ensures the integrity of transactions, and builds user trust, which is crucial for widespread adoption.
Innovation and Scalability
Like the internet has catalyzed endless innovation, Finternet could open new avenues for financial products and services. The system's scalability and interoperability mean that once a service is developed, it can quickly be adapted and scaled across different markets and user bases without extensive modifications. This could lead to a rapid proliferation of financial innovations that could easily serve highly specific local needs or global markets.
Challenges and Considerations
Despite its promising benefits, the implementation of Finternet comes with its set of challenges:
Regulatory Compliance: It is complex to create a framework that meets the diverse regulatory environments of different countries. The system must be flexible enough to adapt to local laws and regulations without compromising security and operational standards.
Technical Complexity: Building a decentralized, interoperable system that can handle billions of transactions securely is a monumental technical challenge. It requires advanced technology, robust infrastructure, and continuous innovation.
Stakeholder Alignment: It is crucial to align the interests of various stakeholders, including governments, financial institutions, businesses, and consumers. Each group has its expectations and reservations about such a transformative system.
Privacy Concerns: Ensuring user privacy while maintaining transparency and compliance with global regulatory frameworks is a delicate balance that needs to be maintained.
Conclusion
The Finternet concept is bold and ambitious. It aims to transform the financial landscape by making it as open, accessible, and efficient as the Internet. While the challenges are significant, the potential benefits of economic growth, innovation, and inclusion are immense. As the project progresses, it will be crucial to address these challenges through innovation, collaboration, and a steadfast commitment to building a financial system that benefits everyone.
Key Quotes
"The Finternet model advocates for collaborative efforts between public and private sectors to establish a universal digital infrastructure."
"Key to this architecture is its interoperability across systems and scalability, which enables a wide range of transactions across different platforms and legal frameworks."
"This paper presents the Finternet as a concept aimed at creating a more equitable financial environment."
Why It Matters
The Finternet represents a transformative approach to the global financial infrastructure, akin to the revolution brought about by the internet. It promises to enhance financial inclusivity, reduce costs, increase efficiency, and foster innovation by creating an interconnected financial ecosystem. This vision could redefine how financial services are delivered, making them more accessible to underprivileged regions and driving economic growth on a global scale. The realization of such a system would not only transform financial markets but also contribute to the overall economic empowerment of individuals and businesses worldwide.
How I Think About Debt · Collab Fund
In the blog post "How I Think About Debt," published on April 30, 2024, Morgan Housel discusses his perspective on debt, emphasizing its impact on an individual's ability to endure life's volatility. He draws on the example of Japan’s ancient businesses, known as “shinise,” which have survived for centuries by maintaining high cash reserves and avoiding debt. Housel argues that the number of adverse events a person can withstand decreases as debt increases, effectively narrowing the range of survivable outcomes. He highlights the importance of considering all forms of volatility—financial, psychological, familial, and health-related—when evaluating the risks of taking on debt. While he acknowledges that debt can be a useful tool when used responsibly, he ultimately views it as a constraint on flexibility and options, which are crucial for navigating an unpredictable world.
Key Points
Endurance of Shinise Businesses
Context: Japan has 140 businesses that are at least 500 years old, some over 1,000 years old.
Insight: These businesses endure by holding large cash reserves and avoiding debt.
Impact of Debt on Future Outcomes
Context: Debt restricts the range of outcomes one can endure in life.
Insight: With increasing debt, the ability to withstand life's volatility—such as wars, recessions, and personal crises—decreases.
Volatility in Life
Context: Life is inherently volatile, with frequent and varied disruptions.
Insight: Recognizing the inevitability of volatility emphasizes the importance of maintaining financial flexibility.
Types of Volatility
Context: Volatility extends beyond financial issues, including psychological, familial, and health challenges.
Insight: Debt can exacerbate the impact of these various forms of volatility, further narrowing survivable outcomes.
Responsible Use of Debt
Context: Debt can be a valuable tool when used wisely.
Insight: The key is to balance debt without overly constraining future options and flexibility.
Key Quotes
On Debt and Future:
"Debt defines your future, and when your future is defined, hope begins to die."
On Endurance and Debt:
"As debt increases, you narrow the range of outcomes you can endure in life."
On Life's Volatility:
"What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps? One-hundred percent. The odds are 100%."
On Different Forms of Volatility:
"There’s financial volatility...psychological volatility...family volatility...child volatility...health volatility, political volatility, on and on. The world’s a wild place."
On Debt as a Constraint:
"Once you view debt as narrowing what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most: having options and flexibility."
Why It Matters
Morgan Housel’s exploration of debt in "How I Think About Debt" matters because it provides a holistic view of debt's implications beyond merely financial costs. By framing debt as a limiter of one's capacity to endure life’s inevitable volatility, Housel encourages readers to think critically about their financial decisions. This perspective is particularly relevant in an unpredictable world where flexibility and resilience are key to long-term survival and success. Understanding the broader impact of debt helps individuals and businesses make more informed choices, prioritizing financial health and adaptability over short-term gains.
The Verbatim Effect: People Remember Gist Better Than Details – Effectiviology
The blog post "The Verbatim Effect: People Remember Gist Better Than Details" on Effectiviology explores a cognitive bias known as the verbatim effect. This effect describes the phenomenon where people are more likely to remember the general meaning or gist of information rather than its exact details. The article delves into why this effect occurs, illustrating how our memory processes prioritize essential information over intricate specifics. It also discusses the variability of this effect across different contexts and individuals and provides practical advice for leveraging the verbatim effect to improve communication and memory retention.
Key Points
Definition of the Verbatim Effect
Concept: The verbatim effect causes people to remember the core message of information better than its exact phrasing.
Example: When reading a complex sentence, people recall the main idea but not the exact wording.
Examples of the Verbatim Effect
Reading: People remember the general message of a long text rather than the specific words.
Graphs: Viewers recall a graph's overall concept rather than the detailed data points.
Marketing: Consumers remember whether a product seemed cheap or expensive rather than its exact price.
Reasons Behind the Verbatim Effect
Memory Processes: Gist memory (focused on essential meaning) is encoded more effectively than verbatim memory (focused on exact form).
Desirability and Ease: Gist information is more desirable and easier to remember because it represents the most meaningful and least detailed part of the information.
Variability of the Verbatim Effect
Influence Factors: Individual preferences, abilities, prior experience, material type, and goals can affect the verbatim effect's influence.
Exceptions: In some cases, people might recall verbatim details without understanding the gist, such as when memorizing text in a foreign language.
Accounting for the Verbatim Effect
For Personal Memory, Understanding the verbatim effect can help better predict what information will be remembered, which can guide note-taking and learning strategies.
For Communicating with Others: Presenting information focusing on the main message and minimizing minor details can enhance communication effectiveness. Emphasizing key points ensures they are remembered.
Caveats and Context
Variability: The influence of the verbatim effect varies among individuals and contexts.
Detail Level: Adjust the level of detail based on the audience and context. Start with a simple explanation and add details as needed.
Audience Interest: Recognize that audiences may not care about or remember minor details as much as the presenter.
Key Quotes
On Memory Bias:
"The verbatim effect is a cognitive bias that causes people to remember the gist of information better than its exact form, so they remember general meaning better than specific details."
On Memory Processes:
"In general, gist memory is encoded more effectively than verbatim memory."
On Variability:
"The verbatim effect isn’t guaranteed to occur in all situations, and whether or not it affects people, as well the degree to which it affects them, varies based on a number of factors."
On Effective Communication:
"Accounting for the verbatim effect can prompt you to craft your presentation in a way that encourages people to focus on the gist of what you’re trying to say, rather than on the secondary details."
On Learning Strategies:
"Adopting a gist strategy, where you focus on memorizing the gist of information, can lead to better outcomes than adopting a rote strategy, where you focus on memorizing the information by repeating its form in a verbatim manner."
Why It Matters
Understanding the verbatim effect is crucial because it highlights a fundamental aspect of human cognition that influences how we remember and communicate information. By recognizing that people are more likely to retain the general meaning rather than specific details, individuals can optimize their strategies for learning, note-taking, and presenting information. This knowledge can improve educational methods, marketing strategies, and everyday communication, making it easier to convey essential messages effectively while minimizing the risk of information overload. Additionally, accounting for the variability of the verbatim effect helps tailor communication approaches to different audiences and contexts, enhancing overall comprehension and retention.
Time is a Thief. - by Joy Lere, Psy.D. - Finding Joy (substack.com)
In her poignant piece "Time is a Thief," Joy Lere, Psy.D., reflects on the fleeting nature of time and the importance of savoring life's moments. She uses the metaphor of a stroller—once essential for her young children but now sitting unused in her garage—to illustrate how quickly stages of life pass by. Lere emphasizes the inevitability of "last times" in various aspects of life, urging readers to be present and appreciate the now. She discusses the impact of loss and regret and how these can serve as guides for living more intentionally. The piece encourages readers to hold onto the present, communicate their feelings, and live with an awareness of life's finiteness.
Key Points
The metaphor of the Stroller:
Lere recounts the significance of a stroller that once played a central role in her life but now sits unused.
It symbolizes the passage of time and the bittersweet nature of moving past different stages of life.
The Concept of 'Last Times':
Lere highlights how many significant moments in life pass without us realizing it’s the last time.
Examples include the last time a child asks to be held or the final meal in a childhood home.
The Slipperiness of Time:
Time is described as slippery and impossible to control.
The importance of being present and savoring current moments is emphasized.
Impact of Loss and Regret:
Loss often occurs unexpectedly, leaving things unfinished and changing those affected.
Regret can serve as a guide, helping people to live more intentionally by learning from past mistakes.
Living in the Present:
Lere advises against living too much for the future, urging readers to focus on the present.
She emphasizes the value of giving undivided attention to loved ones and experiencing life directly rather than through a phone screen.
Actions to Take:
Savor Small Pleasures: Focus on and appreciate everyday moments.
Forecast Nostalgia: Consider what you will miss about the current chapter of your life.
Leave Less Unspoken: Communicate your feelings and thoughts to those who matter.
Memento Mori: Remember the inevitability of death to inspire a more intentional way of living.
Key Quotes
"Time is slippery. Don't waste yours."
"With most things in life, eventually, there will be a ‘last time’–we just often don’t know when it will be."
"Loss often isn't scheduled. Death never asks when you're ready to part ways."
"Pay attention to the life in front of you as it unfolds (and, please, stop watching it all through your phone)."
"Regret can guide us to move forward differently."
"We can't always 'make up' for lost time, but we can make good on the rest of the chances we've got."
Why It Matters
Joy Lere's "Time is a Thief" is a powerful reminder of the fleeting nature of life and the importance of being present. Lere's message is a call to refocus on the present moment, and the people around us in a world where distractions are constant and the future often takes precedence over the now. By reflecting on the inevitability of "last times" and the impact of loss and regret, the piece encourages readers to live more intentionally, communicate openly, and appreciate the small, everyday moments that make up a life. This perspective is valuable in fostering deeper connections with loved ones and leading a more fulfilling life.
The Limit Does Not Exist—or Does It? — Millennial Money with Katie
In her blog post "The Limit Does Not Exist—or Does It?", Katie Gatti Tassin explores the concept of imposing limits on individual wealth, a provocative idea known as "limitarianism." The discussion is sparked by a 93-year-old billionaire's recent $1 billion donation to make a medical school free forever, an act that raises questions about wealth concentration and societal influence. Tassin reflects on Christine Emba's piece in The Atlantic, which critiques the societal implications of such vast individual wealth.
Tassin delves into the philosophical and practical challenges of setting wealth limits, considering how much wealth is too much and what societal benefits might arise from capping personal fortunes. She questions whether unlimited wealth accumulation truly incentivizes innovation and explores the psychological effects of wealth, including the paradox of choice and the potential for greater happiness with imposed limits. The piece also considers creative solutions like tying the wealth ceiling to the floor, ensuring that the richest can only grow richer if the poorest see improvements. Tassin concludes by pondering personal ethics and societal impacts, ultimately leaving readers contemplating their views on wealth limits.
Key Points
Introduction to Limitarianism:
Inspired by a billionaire's donation to make medical school free, Tassin explores the idea of limiting personal wealth.
References Christine Emba's discussion in The Atlantic about the societal implications of concentrated wealth.
Arguments for and Against Wealth Limits:
Pro-Limits: Wealth caps could redistribute resources to societal needs like public infrastructure or higher education.
Anti-Limits: Unlimited wealth accumulation is seen as a driver of innovation and economic incentive.
Philosophical and Practical Challenges:
Determining an arbitrary and context-dependent wealth limit.
Difficulty in enforcing wealth limits in the current fiscal system.
Creative Solutions:
Proposes tying the richest person's wealth to the poorest, ensuring shared economic growth.
Psychological and Societal Effects:
Examines the diminishing returns of wealth on personal happiness and the paradox of choice.
Discusses how visible inequality, like in San Francisco, impacts collective social consciousness.
Ethical Considerations:
Questions the morality of extreme wealth and whether there's an ethical threshold for personal wealth accumulation.
Highlights the common sentiment that "there are no ethical billionaires."
Key Quotes
On Wealth Limits:
"How much is too much?"
"Presumably there is some point beyond which society begins deteriorating from inequality; when the net effect becomes negative."
On Incentives:
"Even the staunchest defenders of limit-free wealth accumulation will probably concede that there’s such a thing as diminishing marginal returns."
On Creative Solutions:
"The richest person in a given society is only allowed to have X times as much wealth as the poorest."
"It’s the sacred pizza party rule as economic policy: Nobody gets thirds until everyone has their first."
On Psychological Effects:
"If you couldn’t go out and accumulate more, would you actually feel more peace and freedom, than if faced with the daunting prospect of endless ascension?"
On Ethical Wealth:
"None of us expect to become billionaires, so we maintain a safe distance from the accusation. So, the natural question follows: What makes centimillionaires any more ethical?"
Why It Matters
This blog post is significant because it challenges readers to reconsider extreme wealth's societal and ethical implications. It addresses critical issues of inequality, the psychological impacts of wealth, and the potential for societal improvement through wealth redistribution. By questioning the status quo and proposing creative solutions, Tassin's piece encourages a deeper reflection on the role of wealth in society and the potential benefits of implementing wealth limits. This conversation is particularly relevant today, where economic disparity continues to grow, prompting debates about fairness, innovation, and the true drivers of societal progress.
The article discusses a study investigating whether a fish, specifically the cleaner wrasse (Labroides dimidiatus), can pass the mirror self-recognition (MSR) test, a benchmark for assessing self-awareness in animals traditionally used for mammals and birds. Masanori Kohda and colleagues conducted the study, which was published in PLoS Biology. The researchers observed the cleaner wrasse's responses to a mirror and to a modified mark test, where a colored mark was applied to the fish in a location only visible through a mirror reflection.
The cleaner wrasse exhibited behaviors that could potentially indicate self-recognition, such as engaging in unusual behaviors in front of the mirror (e.g., swimming upside-down), examining their reflection, and attempting to remove the mark when a mirror was present but not responding to transparent marks or colored marks in the absence of a mirror. The study concludes by questioning whether passing the MSR test indicates self-awareness or if our interpretation of these behaviors must be reconsidered, especially across different taxa.
Key Points:
Mirror Self-Recognition (MSR) Test: Traditionally used to assess self-awareness in primates and certain other animals, the MSR test involves an animal recognizing a mark on its body that can only be seen through a mirror.
Fish Participation in MSR: The cleaner wrasse is the first recorded fish species to show potential signs of passing the MSR test. This includes reacting to its mirror image with behaviors suggesting it perceives the image as itself rather than another fish.
Behavioral Phases Observed:
Phase 1: Initial aggressive behavior towards the mirror image.
Phase 2: Development of idiosyncratic behaviors towards the mirror may represent self-exploratory actions.
Phase 3: Use the mirror to observe body parts marked with a visible elastomer.
Interpretation of Results: The study challenges the interpretation that passing the MSR directly indicates self-awareness. It suggests that such behaviors could indicate a simpler cognitive process of self-referencing or that the criteria used in the MSR test need adjustment when applied to different species.
Implications for Understanding Animal Cognition: The results suggest that cognitive abilities traditionally associated with primates may not be exclusive and that other animals, like fish, could possess complex cognitive capabilities.
Key Quotes:
On the significance of the findings:
"This remarkable finding presents a challenge to our interpretation of the mark test—do we accept that these behavioural responses, which are taken as evidence of self-recognition in other species during the mark test, lead to the conclusion that fish are self-aware?"
On the challenge of applying the MSR test across species:
"If not, the usefulness of the mark test across taxa must be questioned, as should our confidence in sharp divisions in cognitive abilities among taxa."
On the broader implications:
"Our conclusion is therefore that cleaner wrasse show behavioural responses that fulfil the criteria of the mark test as laid out for other animals, but that this result does not mean they are self-aware."
Why It Matters:
The study is significant because it challenges the traditional view of self-awareness as a trait exclusive to certain vertebrates like primates and mammals. By possibly demonstrating MSR in fish, it prompts a reevaluation of the cognitive abilities of fish and other non-traditional species, urging a reconsideration of how we assess intelligence and consciousness across different species. This could lead to broader implications for animal ethics, conservation, and our understanding of evolution and the distribution of cognitive skills in the animal kingdom.