The Crazy Election of 1800

People with a limited sense of history often struggle to interpret current events in a way that makes sense. Facing challenging times can be terrifying if you believe that no one has ever faced similar difficulties. Understanding that human nature changes slowly and that most events we witness are variations of things that have repeated throughout human history can make the present easier to bear.

I cannot recall a more toxic political environment in the United States. The country is divided in ways that I have never seen before. However, I have personally lived through only twenty percent of the history of the United States. I did not experience the revolution, the civil war, the pandemic of 1918, the great depression, the world wars, the civil rights movement, or the Vietnam war, and I was less than a year old when Richard Nixon was forced to resign in disgrace.

Logic and humility would dictate that I should at least look at the nearly two hundred years of American history that preceded my birth before I draw conclusions about what is happening right now. Especially because tomorrow is a historic day — the 59th presidential inauguration, and not just any inauguration but a transfer of executive power between rival political parties that agree on very little.

The Election of 1800

Prior to the ratification of the 12th Amendment to the Constitution, the winner of the electoral college became President while the runner-up became Vice President. This resulted in political rivals being forced to serve together in the executive branch as was the case in 1797 when John Adams was sworn in as President and Thomas Jefferson reluctantly took office as Vice President. 

Although Adams and Jefferson had been friends as younger men, by 1800 they were bitter political rivals. As much as George Washington wanted to avoid the calcifying effects of political parties, the 1790s had drawn clear partisan lines between the Federalist Party represented by Adams and Hamilton and the Democratic-Republican Party led by Jefferson.

The election of 1800 was absolutely wild — it had everything from slanderous personal attacks, anonymously written screeds in newspapers, claims that Adams was a monarchist, counter-claims that Jefferson was a radical who favored the lawlessness of the French Revolution — and the outcome was eventually decided by the House of Representatives in a contingent election that required 36 rounds of voting before Jefferson was declared the President-elect, with Aaron Burr winning the Vice Presidency.

On March 4, 1801, Thomas Jefferson walked to the Capitol to take the oath of office as the third President but John Adams was already on a stagecoach heading north. Clay Jenkinson’s article examining the reasons for Adams snubbing his successor is an interesting read. Although Adams was grieving over the death of his son a few months earlier, he could have delayed his departure by a few hours to hand over power to Jefferson personally.

America faced its first transition of executive power from one political party to another amid an environment of terrible acrimony. Could anyone witnessing those events believe that the country would go through dozens of peaceful transitions of power over the next two centuries with the incumbent president nearly always attending the inaugural of his successor? 

The Election of 2020

Knowing about the election of 1800 does nothing to make the election of 2020 any less momentous in American history. But knowing that a young country went through massive turmoil, found a way to correct course, and then went on to experience dozens of peaceful transitions of power over the next 220 years inspires some hope for the future. 

Technology has changed but human nature has not. If you wanted to attack your opponent with disinformation in 1800, you would pen an article under a pseudonym and have it published in various friendly newspapers without any “fact checking” or attribution. In 2020, you would leverage social media to do the same thing, except instantly, and on a much broader scale.

The barriers to entry for entering the political debate have fallen dramatically. This has given voice to more people but has also made it harder to separate fiction from fact. We can either delegate “fact checking” to the media or rely on our own sense of history and current events to judge for ourselves.

Nothing that happened in 1800 normalizes what has happened over the past three months or excuses Donald Trump’s boycott of Joe Biden’s inauguration. It is important for the country to see a peaceful transition occur, in person, from one party to another. It is also important for America’s enemies to believe that a transition of power is not an “opening” to take adverse action against us. The point is that what we are seeing is not particularly new or surprising when viewed in historical context.

Postscripts

Those who know the history of the election of 1800 are aware of the fact that Alexander Hamilton played a decisive role and set an example of putting his country’s interests first. 

Hamilton and Adams were both Federalists but they were also political rivals. Adams was a moderate while Hamilton was far more ideological. However, Hamilton was also a patriot and a realist. 

The Federalists were soundly defeated in 1800 and Jefferson and Burr were tied in the electoral college. Hamilton and Jefferson agreed on very little, but Hamilton knew Jefferson was a man of character and principle while Burr was morally bankrupt. Hamilton supported Jefferson which influenced his allies in Congress and proved decisive on the 36th ballot:

There is no doubt but that upon every virtuous and prudent calculation Jefferson is to be preferred. He is by far not so dangerous a man and he has pretensions to character.

As to Burr there is nothing in his favour. His private character is not defended by his most partial friends. He is bankrupt beyond redemption except by the plunder of his country. 

Alexander Hamilton to Oliver Wolcott, December 16, 1800

The acrimony between Hamilton and Burr further escalated in subsequent years. The men finally settled the matter in 1804 in the form of a duel in which Hamilton suffered a mortal injury inflicted by the sitting Vice President of the United States.

As for the relationship between Jefferson and Adams, both men rose above the acrimony during retirement. This is documented for posterity in the form of a close correspondence that lasted for over a decade.

Jefferson and Adams both died on the same day, July 4, 1826, fifty years to the day after the signing of the Declaration of Independence.


Further Reading

Alexander Hamilton by Ron Chernow

Jefferson and the Ordeal of Liberty by Dumas Malone

Jefferson the President: First Term by Dumas Malone

John Adams by David McCullough

Founding Brothers: The Revolutionary Generation by Joseph Ellis

The Adams-Jefferson Letters: The Complete Correspondence Between Thomas Jefferson and Abigail and John Adams

Reward and Punishment Superresponse Tendency

“Never, ever, think about something else when you should be thinking about the power of incentives.”

— Charlie Munger

The power of incentives is obvious. Even small children will modify their behavior in response to incentives set by their parents. “Now, Johnny, you must eat your peas or you will not get ice cream for dessert!” When thoughtfully considered and consistently applied, incentives can be used to promote social good, from the micro level at the dinner table to behavior that impacts society as a whole. However, a naive and simplistic understanding of incentives can easily cause much more harm than good.

The Road to Hell is Paved With Good Intentions

On many occasions, poorly thought out incentive structures have caused serious harm. A famous example of this phenomenon is known as The Cobra Effect. When India was under British colonial rule, government officials were alarmed by the number of venomous cobras that infested the city of Delhi. This was an obvious public health menace. The scope of the problem was so great that the government could not hope to catch and exterminate all of the cobras without the help of the public.

A scheme was developed that compensated citizens who turned in cobra skins. Surely enough, this caught the attention of the people. However, the government did not anticipate that industrious citizens would begin farming cobras just to profit from bounties. Eventually, the bounty scheme was abandoned. Without a market for cobra skins, the farmers released the snakes into the city and the problem was worse than it ever had been before.

We can laugh at this today because, in hindsight, it seems so obvious that this would occur. However, the cobra effect is alive and well today. One must consider not only the direct effects of an incentive but the long-run side effects as well. As Howard Marks advocates, we must be sure to give adequate attention to second-order effects. Marks calls this second-level thinking and it’s what the British rulers failed to do.

Recently, there has been a great need for blood plasma from individuals who have survived a COVID infection. Antibody therapy has been useful for treatment of COVID so why not offer incentives for people who have been exposed to make plasma donations? It makes sense until you consider the incentives this creates for people to expose themselves to COVID in order to sell their plasma. Ridiculous, you say! Maybe not, at least not for college students at BYU who found the $100-200 they could earn from plasma donations to be worth the risk of intentionally getting infected.

Incentives in Business

My favorite example of misaligned incentives in business involves the case of the Federal Express distribution system. Charlie Munger uses the FedEx example in a talk on the psychology of human misjudgment, which appears as a chapter in Poor Charlie’s Almanack. FedEx was having a terrible time shifting packages between airplanes at its central distribution site each night. No matter what management tried, the night shift kept failing to complete its task. Of course, this had a cascading impact on delivery times and customers did not receive the service they thought they were paying for.

The problem was that management was paying the night shift an hourly wage. As soon as management switched its pay model to a fixed amount of pay per shift, the problem disappeared. Employees now had an incentive to complete the sorting process as quickly as possible so they could go home. Of course, presumably management had to ensure accountability to prevent sloppy and inaccurate work, but the existential problem disappeared immediately. Without timely delivery, the entire premise of FedEx’s business model would have failed.

Incentive problems extend all the way from the shift worker sorting packages to the very top of an organization. Every year, public companies prepare what is known as a proxy statement that describes, among other things, the compensation program that rewards top executives. Most large companies employ compensation consultants to develop programs that supposedly align the incentives of management with shareholders. Unfortunately, compensation programs often reward undesirable behavior. For example, any compensation scheme that is tied to the short-term price of a company’s stock will inevitably result in executives watching the ticker constantly and they will have a laser-focus on managing Wall Street expectations on a quarter-to-quarter basis.

The intrinsic value of a company depends on its ability to generate free cash flow for years and decades to come, but it is often possible to juice short-term results in a way that is nearly certain to reduce long term value. This is most obvious in matters of capital allocation. If a certain capital investment is likely to depress profitability for several years before it begins to bear fruit, why would a 62 year old CEO three years from mandatory retirement opt for it if his compensation is tied to the stock price over the next twelve months? Compensation arrangements that are complicated can have a cascading series of negative incentive effects that are very difficult to understand. However, no compensation consultant who proposes a simple arrangement is likely to be viewed as earning his or her pay.

Incentive Caused Bias

“The compensation committee relies on its own good judgment in carrying out its duties and does not waste shareholder money on compensation consultants.”

— Daily Journal’s 2020 Proxy Statement

One way to avoid incentive-caused bias is to avoid advisors. This is what Charlie Munger’s Daily Journal does when it comes to arranging compensation agreements with its top executives. However, sometimes you cannot avoid advisors and in these situations Munger suggests the following antidotes:

The general antidotes here are: (1) especially fear professional advice when it is especially good for the advisor; (2) learn and use the basic elements of your advisor’s trade as you deal with your advisor; and (3) double check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.

Psychology of Human MISJUDGMENT

Learning and using basic elements of your advisor’s trade is perhaps the most effective antidote. If you approach your auto mechanic speaking the language of someone who understands cars, you are far less likely to be ripped off than if you seem naive and confused. I always make it a point to mention to realtors some detail about the local market that obviously took research to learn, such as the average recent selling price per square foot for comparable properties.

The cash register is an invention that Munger often lauds as one of the greatest moral instruments of its time. As I discussed in a recent article, the invention of the cash register had the effect of reducing the temptation to steal. Those who have ingrained criminal minds would not be deterred from following a morally bankrupt path and would attempt to find ways to defeat the cash register. But those who are basically good people yet have a surface-level incentive to steal can be “kept honest” by the fact that they know theft is likely to be detected. Making dishonest behavior unpleasant and difficult to accomplish is a moral imperative.

Retroactive Bribery

One especially pernicious incentive effect that we have seen all too often is the phenomenon that I think of as “retroactive bribery”. In conventional bribery, someone in a position of authority is offered something of value in order to favor the interests of the briber. This type of bribery is common but can be discovered, especially when the bribe involves money in an age where almost every monetary transaction leaves an electronic fingerprint. In contrast, retroactive bribery is devilishly difficult to detect and often the “bribe” itself is not even discussed; it is instead implicitly assumed.

Consider the case of a member of Congress who serves on committees that have a significant influence on military procurement. The scourge of lobbying is well known in Washington and the stereotype is the explicit bribe: Please vote for this bill and we will give you a suitcase with $100,000 in cash. However, this type of bribery is for amateurs. Instead, lobbyists and members of Congress develop cozy relationships over long periods of time. Members of the committee might see a longtime colleague retire from Congress and then magically end up on the board of directors of a major defense contractor earning a quarter-million dollar sinecure annually. The next time the lobbyist approaches the Congressman asking for support on a bill, the member will understand the incentive effects well enough. Not a word need be spoken. Friends take care of friends.

Trust and Incentives

As I discussed in The Paradox of Trust, it would be truly exhausting to go through life without extending a basic level of trust to others, at least when it comes to routine and low-stakes matters. The power of incentives is present everywhere but it would be exhausting to attempt to study and examine the incentives involved in every small interaction of life. Instead, we rely on the norms and customs of society to function on a day-to-day basis and accept some risk, including the risk that the incentives of someone we are dealing with might lead them to cheat us.

When the stakes are high, however, we are well served to internalize Charlie Munger’s advice regarding the superpower of incentives. When you are buying a car or a home, you should carefully think about the incentives of the seller as well as the intermediaries who are involved in the process because the purchase could have consequences that last years or decades. But do not restrict your awareness just to incentive effects. By going through a list of potential areas of misjudgment check-list style, you will likely spot cognitive errors in time to take corrective action. Failure to do so can be disastrous when the stakes are high.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.

The Case for U.S. Savings Bonds

Boring!

I know that is probably your reaction to the title of this article and I can’t really blame you.

There is nothing exciting about savings bonds and you’ll never get rich by investing in them. In fact, you may not even keep up with the cost of living. For most people, there are normally far better alternatives for long-term investments. Yet as we approach the end of 2020, a case can be made to use these mind numbingly boring savings vehicles. Individuals who find themselves in certain common situations could conclude that savings bonds represent the “least bad” alternative.

Bear with me and you might find that savings bonds could be a useful tool in your situation.

The Basics

Except in the case of electing to receive savings bonds through tax refunds, all bonds have been issued in electronic form for several years. TreasuryDirect offers an easy way for investors to purchase savings bonds as well as other treasury securities. Unlike treasury bills and notes, savings bonds are not marketable securities, meaning that the purchaser cannot sell these bonds to other investors. Instead, savings bonds are held by the investor until they are redeemed or reach maturity after thirty years. Savings bonds are not redeemable at all during the first year of ownership and bonds redeemed prior to five years incur a three month interest penalty. The government intends savings bonds to be a medium to long-term investment vehicle for small investors.

Savings bonds offer important tax advantages. They are free of state income tax and while you will be liable for federal income tax, the tax is only due when you redeem the bond or it matures after thirty years. This means that savings bonds offer tax deferral, a rare feature outside of retirement accounts.

There are two types of savings bonds currently offered by the government: Series EE and Series I. One can purchase up to $10,000 of each series every year. Let’s take a quick look at how the two series differ:

Series EE savings bonds earn a fixed rate of interest for the life of the bond. The current interest rate is a minuscule 0.1 percent. Why am I reading this, you might ask? Who in the world would sign up for a bond paying 0.1 percent for thirty years when the Federal Reserve has a 2 percent inflation target? Well, an important but often overlooked feature of the Series EE savings bond is that the government guarantees that the value of the bond will double if, and only if, you hold it for at least twenty years. A doubling of value over twenty years implies a 3.5 percent interest rate. But that is only the case for bonds held at least twenty years.

Series I savings bonds are intended to offer investors inflation protection. These bonds pay a fixed “real” return plus they earn the equivalent of the rate of increase of the consumer price index for urban consumers (CPI-U). Currently, the fixed “real” rate is 0 percent. That’s right, when you purchase a Series I bond, you are agreeing that you will receive no real return whatsoever. Your return will be comprised of only the rate of inflation as measured by CPI-U. In the unlikely event of deflation, the government guarantees that you will never receive less than the purchase price of the bond. Unlike Series EE bonds, there is no guarantee that Series I bonds will double over twenty years. The rate of return is entirely unknown at the time of purchase because the rate of increase of the CPI-U is unknown.

The government also offers Treasury Inflation Protected Securities (TIPS) but TIPS are not savings bonds. TIPS are marketable securities and have complexities that are beyond the scope of this article. However, I should note that the real return on TIPS is currently negative as of late December 2020, which makes the Series I fixed rate of 0 percent superior to TIPS at the time of this writing.

Now that we have a basic understanding of the two types of savings bonds, let’s consider how an investor might use each series.

The Case for Series EE Savings Bonds

There’s no doubt about it – the 0.1 percent fixed rate currently offered for Series EE bonds is pathetically low and inferior to many online savings accounts. There would be no reason whatsoever to purchase EE bonds for an intended holding period under twenty years unless you are expecting significant deflation and the imposition of negative interest rates on bank deposits. In such a situation, Series EE bonds could offer protection from negative rates.

So unless you are expecting deflation, why consider EE bonds?

Most small investors do not think in terms of matching the duration of their assets and liabilities. Insurance companies, for example, think of duration matching when they construct their portfolios. A life insurance company might have a high degree of confidence, from an actuarial perspective, that they will have to pay out a certain amount of nominal dollars twenty years from now. Many insurance companies will seek to match the duration of their investment portfolio to the duration of their expected liabilities.

Consider that mortgage rates are at historic lows in December 2020 with thirty year fixed rate mortgages available as low as 2.5 percent. Let’s say that Michael and Elizabeth, a newly married couple, just purchased a home for $475,000. They were able to make a 20 percent down payment of $95,000. The monthly payment on the $380,000 fixed rate 30 year mortgage works out to just over $1,500.

Michael and Elizabeth are both 35 and plan to retire in twenty years at the age of 55. This isn’t a starter home for them — they plan to live in it for decades to come and have a high degree of confidence that they will not be forced to relocate. Having a 2.5 percent mortgage for 30 years is very cheap money but they don’t like the fact that mortgage payments will continue beyond their retirement date.

The risk of inflation is a huge problem because most future expenses can and will rise as the cost of living rises. However, Michael and Elizabeth’s mortgage payment is fixed for the life of the loan. It will be $1,500 per month or $18,000 per year during the first year and all subsequent years.

If the newlyweds want to provide for the mortgage payment during years 21 through 30 of the mortgage, when they will be retired, using Series EE savings bonds could be a perfect way to achieve this objective. By investing $10,000 per year in Series EE bonds for the next ten years, they know that they will have $20,000 per year during years 21 through 30 of the mortgage. Although they will have to pay income taxes when the bonds are redeemed, the proceeds should still be enough to pay the vast majority of the $18,000 annual mortgage service. The risk of inflation is not relevant in this situation because they duration matched the asset with the liability they know they need to service. And they are better off for doing so because the interest rate on the EE bonds will work out to 3.5 percent which is a full percent greater than the 2.5 percent rate on their mortgage.

Granted, this isn’t so exciting and the couple would very likely do better invested in an equity index over two decades. But few things in life are guaranteed. Using EE bonds to fund a fixed payment obligation bearing an interest rate lower than the EE bond rate is an option worth considering. Of course, there are risks. If Michael and Elizabeth cash those EE bonds even a month before reaching the twenty year mark, they will not earn 3.5 percent annually, but the miserable 0.1 percent fixed rate that would apply in the absence of the twenty year doubling guarantee. This is not an insignificant risk.

The Case for Series I Savings Bonds

The case for using Series I savings bonds differs from the Series EE scenario in terms of the duration of the commitment. Unlike Series EE bonds, Series I bonds are not guaranteed to double over twenty years. All you will ever receive from these bonds, at today’s 0 percent fixed rate, is the rate at which the CPI-U increases. This rate is reset twice a year and is currently 1.68 percent.

With online savings accounts paying only 0.5 percent as of December 2020, an investor could do better with Series I savings bonds even if the bond is held the bare minimum of one year. Sacrificing three months of interest would still result in a return of over 1.2 percent, more than double the rate offered by the highest yielding online savings accounts. Of course, if the CPI-U resets to a lower level in six months, the return the investor will get will be lower than 1.68 percent, but it seems unlikely that we are going to have disinflation or outright deflation in the United States given that the Federal Reserve is determined to create inflation of 2 percent, and perhaps more than that as the economy recovers from the COVID pandemic in 2021.

The idea of using Series I bonds as a substitute for one year treasury bills is also attractive given that the one year treasury yields just 0.09 percent as of late December 2020.

A significant limitation is that you cannot invest more than $10,000 per year in each savings bond series. However, the new year will soon be upon us. There is no reason that you cannot invest $10,000 in the remaining days of 2020 and another $10,000 in January 2021. In addition, you could direct the IRS to invest up to $5,000 of a tax refund in savings bonds. There is nothing prohibiting a taxpayer from overpaying 2020 taxes and directing the refund in early 2021 toward $5,000 of additional savings bonds. So, an investor could put around $25,000 into Series I Bonds in this manner over the coming weeks.

Picking Up Crumbs

Yes, this is all quite boring but we find ourselves in a very low return world and sometimes eking out just a small additional return can be worthwhile.

I have purchased I Bonds in recent days and will be doing so again in early 2021 with the intent of using these bonds as part of my bond ladder. In my case, I will likely hold these bonds for five years in order to avoid the three month interest penalty for cashing out sooner than five years. The five year treasury note currently yields 0.37 percent and it is hard to see the Series I bond returning less than that between now and 2025.

I am under no illusions that Series I bonds represent a good investment. They just seem to be the “least bad” alternative at the moment for funds that I plan to need within the next several years. For longer term commitments, owning well run businesses, either directly or via stocks, offers the prospect of better long term returns, but the key words here are “long term”. Anything can and will happen in equity markets over short periods of time. Having a bond ladder might be boring but it helps me sleep at night and prevents forced sales of stock at distressed prices.

Obviously, everyone has a different financial situation and these ideas may not make sense in your situation. As always, this isn’t tax or investment advice but hopefully the article was at least a little less boring than you thought it would be.

The Psychology of Money

“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris — I wanted the independence. I desperately wanted it.”

— Charlie Munger

The world can appear vastly unequal in terms of the goods and services that people are able to consume. To the slum dweller in Mumbai or Rio de Janeiro, the lifestyle of a middle class American would seem utterly unbelievable. A middle class American would find the spending power of a family worth $20 million completely inconceivable. And the family worth $20 million cannot conceive of the spending power of a billionaire like Warren Buffett or Jeff Bezos.

Wealth can buy material goods and services and this is what most people focus on, both in terms of satisfying their desire to consume as well as their desire to appear successful in the eyes of their peers. But a relentless focus on the material goods that wealth can purchase badly misses the point.

The truth is that time is the currency of life.

The ability to control your time means that you have the ability to control how the most valuable resource you own is spent. The middle class American’s life expectancy might not be quite as long as the life expectancy of a billionaire. Money can indeed purchase better medical care and, for some people, that can provide more time. But the truth is that Jeff Bezos and Warren Buffett cannot hope to enjoy multiples of the time that the rest of us can enjoy on this earth. Their time is limited, just as time is limited for all of us. However, they have both had something that most of us do not have: the ability to control how they spend every day of their lives starting from a very early age.

Most people will never be worth $5 million or $20 million, let alone worth billions. But it is within the power of people earning middle class incomes to design their lives in a manner that gives them increasing control of their time, and with that control comes the prospect of an increased level of satisfaction with life and greater happiness.

As Morgan Housel writes in The Psychology of Money, “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.” If you are reading these words and nodding your head in agreement, you are vastly ahead of the game because this idea is far outside the mainstream of how people view money. For most people, the thought of money is inextricably linked with the goods and services it can buy and how those things will make their lives better and happier. The idea of saving money is grudgingly conceded to be a necessary, but distasteful, thing that responsible people must do. Most consumers view the next paycheck or bonus in terms of what it can buy, not the independence it can provide. And this makes intuitive sense at first glance. Aren’t the wealthy happier than the middle class and the middle class happier than the poor? It seems obvious that this would be the case. How could it not be the case when money can be used to buy so much cool stuff?

For someone in poverty, being able to consume more stuff clearly will increase happiness. The ability to have as much food as your family needs, to have warm clothing in the winter, to be able to air-condition your home in summer, and to have a washer and dryer to avoid going to the laundromat — these are all tangible improvements for someone moving from poverty into the middle class. But beyond a certain point, hedonic adaptation takes hold. You keep ratcheting up your consumption, which brings transitory happiness at best, but soon find yourself right back where you started, except now your baseline set of expectations has grown requiring you to maintain your spending to avoid feeling deprived.

Morgan Housel has been writing about finance and investing for over a decade, getting his start at The Motley Fool and later writing a column for The Wall Street Journal. Housel is currently a partner at the Collaborative Fund and writes frequently on personal finance topics. His approach to money and investing is to view it through the lens of psychology because the human element stands far above all other factors when it comes to the results a person can expect to achieve over time. As Housel notes, investing is one of the very few fields that offer ordinary people daily opportunities for extreme rewards. If you view money through the lens of consumption, the temptation to try your luck in this casino can be overwhelming. However, if you view losing money or interrupting the process of compounding as losing control of your time and sacrificing your liberty, the temptation to gamble is much reduced.

Tame Your Ego

Ego is often the root cause of dysfunctional financial decisions. What are we really trying to accomplish when we buy a fancy house or a $100,000 car? Sure, such things might offer personal utility and enjoyment, at least for a while. But eventually, hedonic adaptation takes over and these new things become the baseline. What many people who consume such items are actually trying to do is signal to others that they have “made it”. They are successful and wealthy and should be looked up to. They want to be admired. And maybe even envied.

Housel asserts that “past a certain level of income, what you need is just what sits below your ego.” Would it bother you if your neighbors do not admire the car that you drive to work each morning? Or if they see you waiting for the bus a block away instead of driving at all? Would it bother you if your co-workers find out that you live in a more modest neighborhood than someone of your income could “afford”? As Housel says, people who are successful with their personal finances “tend to have a propensity to not give a damn what others think about them.”

Wealth is What You Don’t See

There are some interesting paradoxes in personal finance that seem totally obvious once you think about them but escape the consciousness of almost everyone. Housel’s chapter entitled “Wealth is What You Don’t See” gets the prize for an insight that is both extremely valuable and obvious, at least once you pause for a few moments to think about it.

When you see a person driving down the street in a Ferrari, what do you automatically think? “Oh, that’s a rich guy driving down the street.” But do we really know that about the driver? We have no real idea if that is the case or not. Housel uses his experiences as a valet at an upscale hotel to note several important things about drivers of expensive cars. One of the regulars at the hotel who drove a Porsche later showed up in an old Honda after the Porsche was repossessed. But when the regular drove the Porsche, did Housel admire the driver? No, he admired the car, not the driver! Driving a fancy car is evidence of either debt or extinguished wealth. It is not evidence of wealth.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes foregone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

That’s not how we think about wealth, because you can’t contextualize what you can’t see.

When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” And that is literally the opposite of being a millionaire.

The Psychology of Money, p. 98

What could be more obvious? If you want to be wealthy, you must defer consumption. Your wealth, to the extent you invest it in financial assets, is hidden from the world. Few things remain taboo in modern American society, but it is still taboo to go around talking about the size of your bank account or how many shares of stock you own. Those things are invisible whereas what you wear, what you drive, and the home you live in are visible to all. But all of those things are the opposite of wealth. Many people who consume such items are wealthy because they also have financial assets. But they are less wealthy when they consume these items. They may enjoy it, it may be easily affordable, and there’s nothing wrong with consumption, but the fact is that what people think of as wealth is really the opposite of wealth.

What Should You Do?

Providing financial advice is notoriously difficult and those who provide it have an awesome responsibility. Financial advisors are responsible for guiding a client’s financial health in the same way that a doctor is responsible for guiding a patient’s health. Most personal finance books have roadmaps that purport to be actionable things that people can do to achieve their objectives. But Housel does not provide specific prescriptions for what you should do with your money. Why? He doesn’t know you, he doesn’t know what you want, he doesn’t know when you want it, and he has no idea regarding your motivations. This is refreshingly honest but, as is the case with many areas of the book, quite obvious once you pause to think about it.

Instead of providing specific financial advice, Housel does a great job of framing money and wealth in the context of the psychology of human beings, recognizing that it is wrong to simply assume that others are crazy because their decisions do not seem rational to us.

However, this does not mean that the book lacks practical advice.

The wisdom contained in these pages is not going to come from some specific prescription regarding what to do with your investment portfolio, but it could convince people to have an investment portfolio because savings is important, whether you have a specific goal for saving or not. It could convince people that time is the true currency of life and that having control of that time is perhaps the ultimate benefit of wealth. It could increase the humility of those who believe that conspicuous consumption leads to recognition and respect.

It’s All About Freedom

The bottom line is that financial independence is not about what you can consume. It is also not necessarily about quitting your job and retiring. Instead, financial independence is about freedom. Freedom to choose to spend your time as you see fit. Freedom to not do things that you do not want to do. Freedom to not associate with people who you dislike.

When viewed through the lens of freedom, personal finance is no longer the boring and tedious topic that many perceive it to be. Instead, it becomes an essential component of living a good life.

The Illusion of Control

The headlights of the eighteen wheeler suddenly appeared in my rearview mirror and I could tell it was quickly approaching. The rain had stopped but the roadway was still wet as Interstate 81 descended into the town of Christiansburg in Virginia’s long and scenic Shenandoah Valley. As I passed the slow-moving van in the right lane, the massive truck was suddenly tailgating and flashing its lights in annoyance. As I sped up to nearly eighty miles per hour and merged back into the right lane ahead of the van, the truck flew by on my left, coming perilously close to sideswiping my small rental car.

As Marcus Aurelius wrote, “You could leave life right now. Let that determine what you do and say and think.”1 Taking risks in life is unavoidable because the world is full of perils and one cannot live in the world without accepting this reality. However, the choices we make can greatly influence the chances of encountering various types of risk as well as the consequences of negative outcomes. Being oblivious to peril may make life temporarily more pleasant and certain people might go through a long lifetime unscathed through sheer luck. But that doesn’t seem like an intelligent way to bet.

The unpleasant reality is that we are in less control of our lives than we would like to admit.

We all seek to control the path of our lives and guarantee a positive outcome, but we could depart from this life at any moment of any day. And we cannot afford to ever forget that.


Why did I choose to drive over two thousand miles earlier this month rather than fly to my destination? The answer is that my perception of the risks of COVID-19 led me to rent a car and drive in order to avoid potential exposure at airports and on commercial flights. In making this decision, I most certainly did not eliminate risk. Instead, I shifted one type of risk for another. I traded the risk of exposure for a few hours on a commercial flight for the risk of exposure during the inevitable stops that are part of a long road trip. In addition, I traded the very low risk of death as a result of a commercial airline accident for the substantially higher risk of death due to an automobile accident.2

Correctly assessing risk is fraught with peril because it is all too easy to think about risk in ways that make no sense. Additionally, it is easy to think that you have more control over certain situations than you actually have. For example, nearly three-quarters of Americans believe that they are above average drivers which is obviously not possible. This is true even though nearly all drivers admit that they have engaged in unsafe driving practices at various times. The illusion of control coupled with a delusional sense of superior skills leads to systemically underestimating certain types of risk. Auto accidents are simply things that happen to bad drivers, not to us.

Of course, it only takes a minimal amount of thought to conclude that the risks of driving are, in fact, much greater than flying in normal times. Even if you insist on believing that your driving skills are above average, all of those other terrible drivers are out there and can cause accidents that could injure or kill you.

Two years ago, I was a passenger in a car that was struck in a low speed collision by a driver who made an illegal left turn. Although there were no serious injuries, my ribs were bruised badly enough to make running impossible for two weeks. There’s nothing like being slapped with reality to realize what can happen to the human body in a collision at highway speeds.

We control much less in our lives than we would like to acknowledge in normal times. Making decisions in the midst of a pandemic throws in another variable that makes rational risk assessment even more difficult.

I think that I am an above average driver (who doesn’t?), but I have driven enough miles in my life to know that being on the road is inherently dangerous. Coupled with the sheer boredom of interstate highway driving for hundreds of miles per day, the drudgery of traffic jams, and the interminable construction during summer months, I would normally opt to fly on any trip likely to require more than eight hours of driving. However, somehow COVID-19 altered my perception of risk to the point where I thought of driving as lower risk when considering the odds of infection.

The illusion of control makes it more appealing to travel in a private vehicle than to accept the risk of being in a long metal tube with potentially over a hundred other passengers in close proximity. There is no control when traveling on an airplane. Not in terms of controlling the safety of the aircraft’s operation or the behavior of other passengers who might be just a few feet away. There is no way to know if the person seated behind you or across the aisle has COVID-19. There is no way to stop someone who decides to take off their mask and happens to sneeze without covering their face. Random behavior, even with no malicious intent, can occur on a flight.

Of course, when you travel long distances in a car, you have to stop at various times to use the bathroom, purchase fuel for the car, and eat meals. And although I tried to cover both 1,100 mile one-way trips without stopping for the night, eventually the risk of continuing to drive after sixteen or seventeen hours on the road forced me to stay in motels on both legs of the trip. Every one of these interactions brings potential exposure to COVID-19 as well. I cannot control what the person in the next row of an airplane does, and neither can I control whether the person at the front desk at the hotel takes his mask of and sneezes just as I’m walking in the door.

A quick Google search regarding the COVID-19 transmission risk of traveling on a commercial flight yields hundreds of links with varying opinions. However, there is compelling evidence to suggest that the air on commercial flights is actually cleaner than the air found in many other settings such as restaurants, grocery stores, or private residences. A recent National Geographic article makes the following points regarding aircraft that are equipped with HEPA filters:

About 40 percent of a cabin’s air gets filtered through this HEPA system; the remaining 60 percent is fresh and piped in from outside the plane. “Cabin air is completely changed every three minutes, on average, while the aircraft is cruising,” says Becker. (Lufthansa has a video showing how HEPA filters work.)

Officially, certified HEPA filters “block and capture 99.97 percent of airborne particles over 0.3 micron in size,” says Tony Julian, an air-purifying expert with RGF Environmental Group. The efficiency of these filters, perhaps counterintuitively, increases for even smaller particles. So while the exhaled globs that carry SARS-CoV-2 can be quite small, HEPA filters effectively remove the vast majority from the air.

National Geographic

Of course, the effectiveness of filters only exists if the air travels through the filter before reaching you. There is still a risk of direct contact with an infected person who could spread the virus directly to you. Your seating location on a plane also can have a significant impact on your risk of infection, with those in window seats toward the front of the plane having the lowest risk of encountering other passengers. Obviously, staying seated rather than moving around the cabin further reduces risk in flight. Masks are the best tool to avoid person-to-person transmission before air can travel through the filters.

In order to travel on a commercial flight, one must navigate not only the airplane itself but the airport terminal. Some of the measures in place, such as temperature screening, might have an element of “security theater” since asymptomatic transmission of COVID-19 has been common. However, by barring symptomatic passengers, requiring masks, and ensuring social distancing, navigating an airport seems no more perilous than navigating the grocery store. Certain airlines such as Southwest, have taken additional precautionary measures to limit risk such as capping the number of passengers on a flight to ensure that middle seats are empty, except when family members choose to sit next to each other. Southwest flights also undergo deep cleaning and there are advanced HEPA filters on board.

The available information we have today makes it clear that the best policy is to limit exposure in general and clearly travel brings about inevitable opportunities for exposure. However, nearly six months into this pandemic, a certain level of travel becomes necessary for many people and once you decide that you need to get from point A to point B, the relevant question is to weigh the relative risks of modes of travel. The illusion of control might make it seem like driving limits the risk of COVID-19 exposure relative to getting into that long metal tube and “surrendering control”, but the illusion is irrational. Next month when I travel to the same destination again, I plan to fly on Southwest Airlines rather than accept the hazards that come with driving 2,200 miles.


As I reached the outskirts of Birmingham, I was optimistic that I had enough time to make it to my destination by midnight. I had already driven nearly eight hundred miles, traffic was moving quickly, the afternoon storms were over, and the sun was beginning to set as I drove west on Interstate 20. Suddenly the traffic came to a complete stop. Another traffic jam probably caused by the interminable construction taking place all over the country. Google maps showed a long red line extending into the city, indicating a long delay.

A half hour later, the line of fire trucks and ambulances in the distance made it obvious that this was not a construction delay. As traffic narrowed to a single lane on the left shoulder to pass the scene, I first saw the burnt out cab of the truck, still smoldering. Then I saw the unrecognizable remains of a small vehicle that had been totally destroyed in a way that was obviously not survivable.

One or more people clearly lost their lives that afternoon, but you will never read about them on the front page of a newspaper or hear a television reporter tell their life stories. The idea that we are masters of our fate is an illusion. We can take precautions, consider all available information, and choose prudently, but total control is a chimera.

I decided not to push my luck by driving another three hundred miles and checked into a motel.

“Let us prepare our minds as if we’d come to the very end of life. Let us postpone nothing. Let us balance life’s books each day. . . .The one who puts the finishing touches on their life each day is never short of time.” 

Seneca

  1. Meditations 2:11 []
  2. The National Safety Council reports that 39,404 people died in the United States in 2018 as a result of motor vehicle accidents. Commercial airline fatalities are extremely rare in the United States. []
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