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The search, sometimes financial, for happiness

October 23, 2020

American Satirist H.L. Mencken famously defined Puritanism as "the haunting fear that someone, somewhere, may be happy."

Former University of Toronto Business School Dean Roger Martin remarked recently to Bloomberg:

"Aristotle said that if a person sets out in life to be happy, they’re unlikely to end up happy. But if a person who sets out to live a good life — by which he meant a life of servitude to their society and their fellow citizens — they’re likely to end up happy."

I've been watching the 20-year growth of books about achieving happiness, and also watching societal happiness fall over that same period (maybe the books were poorly written and made people unhappy?).

Aristotle has a good point. You probably don't get to be Aristotle without a few good points in your lifetime quiver, but this one is particularly relevant today. The fatigue of our situation is setting in and people are stressed on many levels. We're looking for happiness.

How does this relate to finance? A stronger financial position increases happiness for most people up to a point. Backing away from the financial ledge, having some cushion, being able to make some mistakes - money adds value. I lost a car tire once. It was dumb but I did it. But it wasn't devastating. I was happier because I had the money to cover it. The tire guy was happy too.

Surprisingly (or not?), this trend can reverse at a certain point. Even stronger financial positions can lead to less happiness. Market drops can add anxiety. Friends might treat you differently. Loss of direction may set in. CNBC consumes your attention.

Nobel Laureate Daniel Kahneman and economist Angus Deaton studied this issue, and ten years ago found that $75k salary-wise was the breakpoint where increased income stopped adding significant happiness (note income, not wealth). A summary of their work is here.

Dan Cunningham

1 American happiness is declining significantly. Washington Post.

2 It was not connected to the car at the time. Here in Vermont we have to switch to snow tires.


Advice + Products = Conflicts of Interest

October 2, 2020

Large financial firms increasingly want to create products and give advice. It's probably not surprising that the advice they give often leans in the direction of the products they make. We see this commonly, both with individual investors and 401k plans.

A financial firm trying to maintain high margins on the backs of their clients is under increased pressure to find ways to create "margin opportunity" or "margin expansion." (I particularly love "margin opportunity" as a term btw.) One technique is to create a stack of fees: if you become the advisor, and you as the advisor move clients into funds you also make, your internal referral protects the revenue from going elsewhere, and helps the firm overall.

Evidence of this approach appears in firm-owned private real estate funds, private equity vehicles, private Unit Investment Trusts, proprietary mutual funds, or firms just moving clients into their own funds without a careful review of the alternatives. Many of these options, unfortunately for the client, are not easily liquidated (which implicitly reduces their value).

But it's not objective advice, and the business of advice must be objective to be successful. The loyalty, both ethically and structurally within the firm, must only be attached to the client. Internal objectives should not dilute that loyalty.

One Day In July is not in the product business. You won't see our name on the funds in your account. We line up vendors to compete for our clients' capital. Vanguard, Blackrock, Schwab and others make their case via written documents. We do not allow payments, we do not allow bestowed trips or entertainment, and we don't love meetings. Just written arguments.

The effect of this reverberates beyond fees: impartial product selection allows us to focus on only the investments that we believe are optimal for a client's portfolio.

Dan Cunningham


Investing and politics do not mix well

September 11, 2020

Over time I have seen people lose a tremendous amount of money due to U.S. presidential elections. Convinced of a particular viewpoint and eventual outcome, they place bets on the stock market, sometimes incurring capital gains taxes if selling prior to an election.

It's a terrible idea.

The political-financial thesis that an investor espouses might be correct, but even if it is, it might not be a dominant driver. There is 1. No way to know if the thesis is correct in advance and 2. Really no way to know where it stands in the order of priority. These two problems are compounded by the fact that for most people, elections are emotional and they see their own values reflected in the outcome. It's a potent cocktail of error.

Markets dislike uncertainty, and close elections, particularly one where there may be a contested result, are not going to give the market giggles. In theory, once an election is over, the market, shall we say, "appreciates the stability."

Financially speaking, this fall parties will resort to familiar themes regarding stock market performance. Republicans will say they are better for the economy, jobs, and the stock market. Democrats will counter with the fact that the stock market has, since WWII, done better under Democratic presidents. (Democrats won't mention that the start and end dates matter a lot - for example decisions made by George H.W. Bush may have contributed to the Clinton boom.) Republicans will counter that control of Congress matters in the equation.

As a Vermonter, I feel compelled to point out that since 1923, our native, frugal Calvin Coolidge trounced every other president, by far, at 26.1% returns on the Dow *per year*1.

I don't love political parties, because their incentive is to perpetuate themselves in addition to, and sometimes rather than, serve the nation. As an example, Democrats and Republicans formed a corporation to control access to debates, restricting third-party candidates who might have new ideas 2. Duopolies will always favor themselves, whether in business or in politics.

Try to keep the investing and politics in separate mental buckets. Some things shouldn't mix.

Dan Cunningham

1Calvin Coolidge. The Best and Worst Presidents. Kiplinger 8/4/20.

2Commission on Presidential Debates

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