The Digest #1

Published on January 1, 2020

 In Today’s Issue:

  • Welcome to the 2020s
  • Happy 96th Birthday, Charlie Munger!
  • Jim Simons and Renaissance Technologies
  • Important IRA Changes for 2020
  • From the Archives: WSJ Coverage of Warren Buffett in 1977

Welcome to the 2020s!

Today is the start of a new year that also marks the beginning of the 2020s. Most people regard the start of the year as a chance to reflect on the past and plan for the future, and this is even more true at the start of a new decade. As Eugenia Cheng writes in the Wall Street Journal, a new decade feels momentous because we are changing two digits which seems like a more significant change than just incrementing the last digit. This is a psychological construct but one that is very real to the majority of people.

Whether we are interested in how to best live our day to day lives or how to profit in financial markets, understanding human psychology is an absolute prerequisite, which is why the topic has been frequently discussed on The Rational Walk over the years. We can go through life plodding along and trying to figure out our own psychology and those of others or we can learn vicariously through the experiences and wisdom of others.  Learning vicariously is much less frustrating because human beings have encountered essentially the same problems throughout our history, albeit in different circumstances.

I often advise people who are looking for guidance on difficult topics to study the stoics.  But the popular perception of stoicism can be summed up by “keeping a stiff upper lip”. Telling people having significant problems to essentially just cope with it is not helpful. But fortunately, stoicism provides much more to guide us than keeping a stiff upper lip. The best place to start is with Marcus Aurelius who wrote Meditations over eighteen centuries ago. If you are interested in making changes in your life for this new decade, having a “conversation” with Marcus is a good place to start. The applicability of stoicism to modern life may surprise you. My guess is that the relevance of stoicism probably surprised Charlie Munger as well when he first read about it. 

Happy Birthday, Charlie Munger!

Charlie Munger was born on January 1, 1924 and turns 96 years old today. Happy Birthday, Mr. Munger!  Most readers will be familiar with Charlie Munger, but for those who are not, he has served as Vice Chairman of Berkshire Hathaway for over four decades and is commonly thought of as Warren Buffett’s right-hand man.

Throughout his life, Charlie Munger has focused on understanding human psychology and harnessing it for the benefit of himself and those around him while avoiding the pitfalls that await those who insist on learning everything through personal experience.  Mr. Munger has developed a framework that attempts to study human misjudgment with the idea that more than half the battle in life is knowing what to avoid.  Studying Charlie Munger’s Psychology of Human Misjudgment has been one of my long term projects for several years.

One of the psychological tendencies emphasized by Mr. Munger is what he calls “inconsistency-avoidance tendency” which is exactly what it sounds like. Human beings are reluctant to change, especially when doing so would not be congruent with their past actions or their notion of the kind of person they are or wish to be. 

Along with the many pernicious effects of this tendency are some positive effects both for individuals and civilization. One of the reasons many important events in life are accompanied by public commitments is to reinforce their importance. This is one of the reasons people get married in front of their friends and family and why there are public ceremonies to initiate individuals into various professions. 

As we enter this new year and new decade, you can harness the inconsistency-avoidance tendency in your favor by identifying a habit or practice that you want to engage in and making this commitment both formal and public.  Even for commitments that are never communicated to anyone, the mere act of writing it down, preferably on an actual piece of paper, can make you more likely to follow through later. And publicly announcing your intentions to your family, close friends, and co-workers can further hammer in your intentions. At a later time, when tempted to backslide, the powerful psychological impulse of wanting to avoid inconsistency will work in your favor rather than against you.

Those who are interested in learning more about Charlie Munger should start with Poor Charlie’s Almanack, the best compilation of his multi-disciplinary process of thinking available today which includes several of his best speeches. The only biography of Mr. Munger is Damn Right!, which is now nearly twenty years old but worth reading nonetheless. Those of you in the Los Angeles area, or willing to travel there, can hear from Mr. Munger in person at the Daily Journal annual meeting on February 12. 

Jim Simons and Renaissance Technologies

Jim Simons did not want his story to be told, but that did not stop Wall Street Journal writer Gregory Zuckerman from digging into his personal history as well as the evolution of his firm, Renaissance Technologies. The Man Who Solved The Market is one of the most interesting books I have read in some time and I wrote a book review last week which provides more details. Perhaps one of the reasons I find Simons so fascinating is that his style of investing is completely different from value investing. In financial markets, there are many ways to win.

Important IRA Changes for 2020

Readers should be aware of several significant changes to Individual Retirement Account (IRA) regulations that take effect today. Most reporting on the subject has characterized the changes as a mixed bag and have focused on the fact that individuals will now only have to take required minimum distributions (RMDs) from traditional IRA accounts starting at age 72 rather than 70 1/2. While it is true that this change will allow IRA accounts to compound without distributions for an additional year and a half, the required distributions will also be higher when the accounts are first tapped because the distributions are based on the remaining years of life expectancy which obviously declines as the account holder gets older.  

The more significant change involves regulations related to how quickly an inherited IRA must be depleted. Previously, it was possible to leave an IRA account to anyone and such an “inherited IRA” would only be subjected to RMDs over the lifetime of the recipient.  For example, a twenty year old who inherited an IRA from his grandfather would only have to take a small distribution each year (and pay taxes on that distribution) because the RMD would be calculated to account for his long life expectancy. Under the new regulation, there is no required minimum that must be taken annually, but the entire balance of the IRA must be withdrawn within ten years. In practice, the young man would have to carefully manage distributions over the next ten years to avoid being pushed into a very high tax bracket, depending on the size of the account he inherited. 

Although Roth IRAs are not subject to tax when funds are withdrawn, the new regulations also require Roth IRAs to be depleted within ten years. Whether the inherited IRA is a traditional or Roth IRA, the recipient will potentially lose decades of compounding. And adding insult to injury, many forward looking IRA owners converted their traditional IRA to a Roth IRA, paying current taxes, hoping to leave it to a young recipient who could enjoy decades of tax free compounding.  Poof!  There goes that tax strategy!

Many argue that IRAs were always intended to be retirement vehicles and not vehicles for intergenerational transfers of wealth.  The merits of that argument warrant debate but it is also unfair to those who planned well based on existing regulations to have the law retroactively applied to their accounts.  As The Wall Street Journal argued recently, it would have been more fair to grandfather existing accounts and apply the new regulations to new accounts. 

The new tax treatment does not apply to spouses who inherit IRAs and in certain other cases. This newsletter is obviously not tax advice, but I thought this change was important enough to bring up and it might be worth speaking to a tax advisor if this change could apply to you.

From the Archives: WSJ Coverage of Buffett in 1977

There have been over 800 articles published on The Rational Walk over the past eleven years and most of them are “lost” in the archives but still relevant today. I’ll usually post a link to one of these articles in each newsletter issue. This week, check out this article where I discussed one of the earliest Wall Street Journal articles about Warren Buffett. It’s fascinating to see how Warren Buffett was viewed by journalists over four decades ago.

Does the new decade start today or on January 1, 2021? Most Americans say that it begins today and who are we to argue? Of course, this is nothing like the argument over when the third millennium began. Everyone celebrated that milestone a year too early.

This concludes the first issue of Rational Reflections.  Future issues will contain content that will appear exclusively in the newsletter along with abstracts and links to longer-form articles appearing on The Rational Walk website.  In addition to original content, the newsletter will contain links to other interesting publications.  Current events are important and will often be discussed, but an excessive focus on “the news” can be harmful because it can obscure the lessons we should learn from history.  The newsletter will aim to balance topics related to what’s happening now with what’s happened in the past that we can learn and benefit from.

Although the publication schedule may vary to some degree, you can expect new issues to be sent out weekly at the outset.  Thanks for subscribing. 

Copyright and Disclosures

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC. Certain links in this newsletter and on The Rational Walk are affiliate links to The Rational Walk participates in the Amazon Affiliate program which provides a small commission when readers purchase products after clicking on affiliate links. Prices paid for products through such links are the same as prices charged when visiting directly. 

The Digest #1