The Digest #25

Published on June 10, 2020

In Today’s Issue:

  • What’s Your Magic Number?
  • Risks Too Painful to Contemplate
  • Interesting Reading – Links to Articles
  • D-Day Plus 20 Years – Eisenhower Returns to Normandy

To read last week’s newsletter please click here.

What’s Your Magic Number?

If you ask most Americans how much they need in order to achieve financial independence, the response will almost always be given in terms of the level of wealth that they aspire to accumulate. However, thinking about the problem in this manner has a number of deficiencies.

The primary issue is that it is not the level of wealth that matters as much as the cash flow that can be safely drawn from that wealth every year. When aiming to achieve a goal, it is important to focus on what the goal actually is, and that goal is not being able to look at a net worth figure but to fund expenses and to be relieved of having to trade precious time for income.

Most personal finance topics are more related to human psychology than economics, and it is important to frame the key decisions in a manner that maximizes the potential for success. I examined this topic in an article on The Rational Walk this week. 

Click here to read What’s Your Magic Number?

Risks Too Painful to Contemplate

When most Americans think about earthquakes, California quickly comes to mind. The famous San Andreas fault and other faults within the state have caused major havoc over the years with the 1906 San Francisco earthquake being the most famous example.

The 1989 Loma Prieta and 1994 Northridge earthquakes both caused billions of dollars of damage and exacted a major toll in terms of death and injuries. I remember the extended shaking of the Loma Prieta Earthquake and its aftermath, which took place just as the third game of the 1989 World Series was about to begin. We were surprised, of course, but a chance of earthquakes was something everyone in the San Francisco Bay Area understood as a risk.

More recently, the 2019 Ridgecrest earthquake and its recent aftershock hit in a rural part of the state which fortunately limited the damage. Nevertheless, the prospect of a major earthquake in California is ever-present.

However, California is not the only state in danger when it comes to quakes.

In The Really Big OneKathryn Schulz writes about the inevitability of a massive earthquake that will eventually devastate much of the Pacific Northwest. North of the San Andreas Fault, off the shore of Northern California, Oregon, Washington, and British Columbia lies the 700 mile long Cascadia Subduction Zone. The subduction zone occurs where the Juan de Fuca oceanic tectonic plate is sliding under the North American tectonic plate, slowly and inexorably building up pressure that will inevitably be released one day in a massive earthquake followed by a catastrophic tsunami.

Schulz discusses the possibility that only the southern portion of the fault will give way, in which case the Pacific Northwest will likely experience a 8.0 to 8.6 magnitude earthquake. The odds of such a quake are about 1 in 3 over the next fifty years.

If the entire fault gives way at the same time, the result will be a 8.7 to 9.2 magnitude earthquake. The odds of such a quake are about 1 in 10 over the next fifty years.

What is shocking is that scientists did not know that the Cascadia subduction zone had produced a major earthquake until three decades ago and no one even knew it existed fifty years ago. But we now know that the fault produced a massive earthquake around 1701.

We have built an entire civilization on top of the continent’s worst fault line:

… We now know that the Pacific Northwest has experienced forty-one subduction-zone earthquakes in the past ten thousand years. If you divide ten thousand by forty-one, you get two hundred and forty-three, which is Cascadia’s recurrence interval: the average amount of time that elapses between earthquakes. That timespan is dangerous both because it is too long—long enough for us to unwittingly build an entire civilization on top of our continent’s worst fault line—and because it is not long enough. Counting from the earthquake of 1700, we are now three hundred and fifteen years into a two-hundred-and-forty-three-year cycle.

The entire article is well worth reading to better understand what a massive earthquake and tsunami would do to the Pacific Northwest. The damage to human lives and property would be massive. The Federal Government would be the only entity capable of funding a rebuilding effort and any such effort would take years or even decades. The entire region will never be the same, especially if the entire fault gives way at the same time resulting in a massive ~9.0 magnitude quake.

We now know that this outcome is an inevitability, but what can people already living in that region do about it? Very little, other than to move to another part of the country. This is not feasible for most people, so the risk, while ever-present, will remain one that is too painful for most people to contemplate until it occurs.

Click here to read The Really Big One

Interesting Reading

How Jefferson and Franklin Helped End Smallpox in America by Clay Jenkinson, May 1, 2020. These Founding Fathers were early proponents of vaccine development. (Governing: The Future of States and Localities)

This Bull Market Isn’t as Big as You Think by Jason Zweig, June 5, 2020. Just a few big winners are responsible for most of the stock market’s rapid recovery. (Wall Street Journal)

Is This Europe’s Berkshire Hathaway? by Stephen Wilmont, June 2, 2020. At the investment vehicle behind Fiat Chrysler and Ferrari, John Elkann is starting to take greater ownership of an impressive record. (Wall Street Journal)

A Viral Market Update IX: A Do-it-Yourself S&P 500 Valuation by Aswath Damodaran, June 4, 2020. Discussion and downloadable data regarding various market valuation metrics. (Musings on Markets)

At-Home Covid-19 Testing Arrives, With Accuracy and Access Questions by Charity L. Scott, June 2, 2020. A handful of labs have started getting the green light from regulators to sell at-home coronavirus tests, but are dogged by questions about their accuracy and affordability. (Wall Street Journal)

The Sickness in Our Food Supply by Michael Pollan, June 11, 2020. Some of the reasons behind food supply problems during the COVID-19 pandemic in the United States. (New York Times Review of Books)

The Fischer Random Chess Stock Market by Vitaliy Katsenelson, June 9, 2020. The lessons of Fischer random chess games applied to stock markets in the COVID-19 crisis. (Contrarian Edge)

D-Day Plus 20 Years – Eisenhower Returns to Normandy

Two decades after D-Day, former President Dwight D. Eisenhower returned to Normandy and was interviewed by Walter Cronkite about his experiences leading the allied invasion of Europe on June 6, 1944. 

Eisenhower Interviewed by Cronkite 20 Years After D-Day

Quote of the Week

“My word, how mortals take the gods to task! All their afflictions come from us, we hear. And what of their own failings? Greed and folly double the suffering in the lot of man.”

— Zeus commenting on the state of mankind in Homer’s The Odyssey

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The Digest #25