How to Pick your 401K Investment.

~ Hermann P ~ 4 Comments
The 401k has essentially replaced pensions as the dominant way that people save for retirement. Regardless of whether you think that is good or bad it generally creates much more choices for employee investors. Few companies can or will give advice on fund selection and the companies who provide the system to the company may not have their interests aligned with employees.

So I tried to put together a fairly simple way to help pick.

WHAT TO AVOID

1) Avoid Return Chasing.
Probably one of the worst things you can do is filter by 3, 5 and 10 year returns and pick the one that has the highest return. It’s been proven over and over again that “past performance is no guarantee of future results. Actually in many cases the reverse is true. The better the past returns, the more people tend to pile in and thus the price of the investment has gone up a lot meaning that a normal “regression to the mean” will cause future performance to be worse.

Don’t get clever and try to buy the worst performing funds either because many funds disappear completely leaving the investor with $0.

2) Avoid Making things complex.
I think it’s wise to stick to 2-4 funds. Anything more gets really messy and complicated. You have to start thinking about which companies the funds hold and in what %, because there might be lots of investment overlap. You have to understand the different strategies used by the different fund managers. You have pay more attention to which indexes they compare themselves against. Additionally this generally has very little effect on long term overall performance of the investment, and it leads to “activity” by the investor that is almost always negative for returns.

3) Avoid looking at it too much.
In many situations monitoring and information are powerful tools. In investing they can be just as effective as blowing you up and giving you increased performance. Money has a huge impact on our emotions and losing it is really scary (I’m sure many of you are feeling that after “Brexit” last week). Those big moves up and down make us react in ways that are generally bad for our long term investment performance. The best advice I can have is to try to not look at your portfolio very often. Maybe a couple times a year or once a month at most; and decide in advance what you are going to do (or not do) and when you are going to do it.


WHAT TO DO

Let’s pretend we have 100k in our 401k with Fidelity, where should we put it?

1) Max any Matching
401k matching is free money. Of course ever article ever written about 401Ks says to do this. For some people it’s really hard because they are living on every dollar they earn. Still… if you can, cut things out of your budget… maybe that coffee in the morning or go out to eat less or whatever. If your employer has a match not only do you get double dollars, you also get them Tax free AND you get to avoid taxes on the compounding earnings over many decades (assuming you are younger).

A strategy I used when I was younger was upping it by 1% every 6 months to a year. A 1% pretax drop in my pay isn’t that noticeable, but over 3-4 years it increases contributions to 5%+ and that can have a HUGE impact over 30 years. It’s the boiling frog, but in this case it makes you richer instead of killing you :).

2) Define your risk tolerance and asset allocation.
This can be really tricky for people. Traditionally it comes down to stocks, bonds and cash. Since cash is elsewhere, the 401k really comes down to stocks and bonds. My suggesting is if you don’t know what your risk tolerance is and you are going crazy thinking about whether the market is high or low or if you should subtract your age from 120 and then set your % or if you’re a little older now, or if the bond market is overpriced. I’d keep it simple and just take 70/30 stocks/bonds and start from there.

3) Focus on fees.
When I look at which investments to make I use fees as the #1 filter. Here’s why.

Assume you have 100k in your 401k and assume that on average it will return 4% inflation adjusted a year for the next 30 years.

That initial 100k represents a “job” that “pays” you $4,000/year.

I think of fees as a “tax” on my INCOME as opposed to a cost on the PRINCIPAL. So when I evaluate fee impact I don’t do this:

100,000 * (1% fee) = 1000/year. “Wow. That’s only 1% of my money, that doesn’t seem like much.”

I do this
$4,000 income from job / $1,000 fee = 25%. “Hang on. The fund is taking 25% of my money? That seems really high.”

I’m convinced that second way is the way to evaluate ANY investment service that take a % of your money.


LET’S MAKE OUR CHOICES
So we have 70k to put in stocks and 30k to put in bonds, which ones?

STOCK SELECTION


So my first goal is to find the funds with the lowest fees.
Fidelity lets me do this pretty easily as I can browse the investment choices and show the fees in a nice list (they don’t let me sort by fees, so it’s a bit more work). Here’s what it looks like:

You can see that the first tab is annual returns, followed by cumulative total returns. That’s what most people use. I barely look at them because I consider them mostly noise.
I’m VERY interested in that gross expense ratio. The lowest one is the FID 500 Index PR at 0.07%. The highest one is the JPM Midcap Value IS at 0.94%. Now all of these fees are pretty decent as many go up to and above 2%; which in our 4% long term return world is 50% of our income. No way.
I honestly think 1.5%+ fees in 401Ks should be pretty much banned. In fact I think anything over 0.5% has no business being in a 401k because it’s just acting as a wealth transfer mechanism from the middle class to the wealthy institutional investors by capitalizing on people’s ignorance. 401k managers who recommend funds that charge 1%+ without major disclosures and resistence (either in person or via automation) should be ashamed of themselves. But that’s just my opinion.
Personally I omit all funds and ETFs that charge more than 0.5%. More generally, unless there is a really strong reason to the contrary, I won’t give anyone more than 0.5% of my investment, period.
In my situation it limits me to a handful of choices. There’s a midcap index, a smallcap index, an international fund, etc. What I would normally look for is some kind of global fund (Vanguard has one called VT that is basically the world stock market in one fund). The other way to do it is to split it into “domestic” (for me the US) and International.
The best domestic option I have is the FID 500 INDEX PR (FUSVX) which basically tries to duplicate the behavior of the S&P 500.
Most people know that VERY few professional investors beat the S&P 500 over time so that combined with the small fees makes it by far the best choice open to me.
For international the best choice is FID INTL INDEX PR (FSIVX) fund because it has a low fee of 0.17% and good diversification. It’s also NON-US which means there will be very little overlap with the FUSVX.
Personally I would put ALL of the 70% into the FUSVX because it’s by far the lowest fees for the diversification. Many people argue that the S&P isn’t well diversified because it’s all big US companies. That’s partially true, but many of those companies get much of their revenue from global sources so it’s far more diverse than it looks. It DOES focus on large companies, but I think the smaller the company and the more focused the investment the more you have to know to invest and this is about SIMPLE choices.
It would be totally reasonable for me to put half of the 75% in FUSVX and half into FSIVX. I just really hate fees and think the S&P 500 is pretty well diversified globally, so that’s what I would do and what I would recommend.
BOND SELECTION
Bond selection is not different. Fidelity doesn’t let me easily filter so I have to find the bond funds inside of that list.
The lowest fee is the FID US BOND IDX PR (FSITX) at 0.17%. Similarly there’s high yield bond funds, international bond funds, and so on, but since bond investments tend to be the more stable/less return part of the portfolio fees matter even more. FSITX is invested in US government and corporate bonds in a pretty “normal” way.
So I would put the full 30% there.
That means I’m omitting international bond exposure which can be argued is not diversified enough. Unfortunately, the best choice for me was the AB GLOBAL BOND Z,  but it’s fees are way higher (0.53%) and it’s 40% US Bonds anyway.
A NOTE ON TARGET DATE FUNDS
Fidelity (and most major 401k providers) have so-called “Target Date” funds which seek to adjust the risk structure based on a targeted date (usually for retirement).
So let’s say you pick FITWX which has a target date of 2025. As it gets closer to 2025 the fund will move more of it’s assets into “less risky” assets such as bonds and cash. It’s basically a well diversified, age adjusted and rebalanced portfolio all in one.
I think these are great, but I HATE the 0.55%-0.77% fees. Vanguard, for example, has a 2025 target date fund that has 0.15% expense ratio. I’m not going to pay 3.5 times more than I could for the privilege of having the word Fidelity on the fund. Sorry.
If the fidelity fund had a competitive fee, I’d just put everything in that and move on. I just can’t pay that 0.66% fee when there’s far cheaper and nearly as simple alternatives. So if your provider has a target date fund that has reasonable fees, I’d probably go with that; and if I roll my 401k over; I’d probably put it into a Vanguard target date fund that matches my expected retirement date.
SUMMARY
So there you have it. 2 investments, simple choices, fairly broad diversification, low stress.
Of course WHAT the market returns I can neither control or predict.
I can control fees so I monitor them and adjust as needed (hasn’t been needed in last 4 years).
I can control spending (to some extent) and thus I can max the matching.
I can control taxes (to some extent) and thus reduce my income liability by saving more in my 401k.
Hope this is helpful!

Simple Visualization of Household Income Distribution by Quintile Over Time

~ Hermann P ~ 1 Comment
I’ve been commenting and thinking about income, unemployment and social effects for a while now, but I had a really hard time finding a nice, simple multi-decade view of household income distribution.

It turns out this is easy to do. The data is readily available here and it goes back to 1967 based on census data… so it’s about as “objective” and consistent as you can get.

APPROACH
My approach is brain dead simple. I take the mean household income by quintile, add up the total and then divide each quintile by the total to get a % of the “pie” that quintile earned. Then I divide each % by the previous year’s % to get the delta from year to year. That should give a somewhat clear picture of how households in different brackets are doing comparatively over time.

I’ll put the table details below.

VISUALIZATION
I used a waterfall chart because I think it does the best job of showing the change over time.

NOTE: The first bar is the delta from 1967-1970 and the second bar is from 1970-2005. Then it becomes annual. I’m doing this on purpose to show the long term change as well as visualizing the last recovery between 2008 and 2014 (I couldn’t find 2015 data).

So here it is by quintile:

INTERPRETATION
We must be honest with ourselves that without knowing the size of each group we can’t know the total impact, but I am going to assume that the highest quintile did not grow meaningfully in % of total population.

So given that assumption, since 1970 every other quintile has had a meaningful decline in income (as a percent of total income to all quintiles) with the worst drop hitting the 2nd quintile.

Additionally, since the great recession only the top quintile has had a gain in income so that pretty much explain why the perception of most people is there hasn’t been a recovery. If your paycheck goes down or stays the same… you don’t feel like anything is recovering.

Now WHY this is happening is playing itself out in lots of political and social debates. I’ll save that for a different day.

In any case it helped me understand how the country as a whole can be wealthier but the majority of the people in it can feel poorer.

RAW DATA TABLE
If you want the actual excel file, email me.

Why the Tesla Model X changes cars forever.

~ Hermann P
Obviously I’m biased.

I picked up my Model X about a week ago and it’s been an impressive experience so far.

There’s lots of reviews out there and most of them are from enthusiasts who have mostly minor, though some major, complaints… but overall think the car is the most amazing thing ever.

I’m one of those people, but for slightly different reasons.

WHAT MAKES THE MODEL X SO GREAT


I’m not going to talk about how falcon wing doors make putting kids in and out of the car super easy.
I’m not going to talk about how the car has insane speed, handling, acceleration, etc. to the point where you can blow away Ferraris on your way to picking your kids up at school.
I’m not going to talk about how the interface and design of the car are on par with anything Apple has done.
I’m not even going to talk about how it’s an EV and therefore sets up the possibility for being completely 0-carbon footprint (with the exception of the materials used to make the car, of course).

OK, SO WHAT THEN

#1: The Model X is a Platform
A brother-in-law of mine put it perfectly. He commented that Tesla has created a PLATFORM and not just a car. Unlike any other car (except the S) the Model X can be constantly updated. And it is. Regular software updates add significant functionality. I’m relatively sure that I will be able to use my Model X to drive completely automatically in the next few years. I won’t need to buy a new car or get a bunch of hardware… it’ll happen through software only, at night, while I’m sleeping in my bed.
Things like safety improvements, preferences, driving quality, even engine and battery performance can be improved via software updates. I suspect that some things WILL require hardware updates, but I bet that the same car I have out in my garage today can be continuously improved and tweaked for many, many years; providing me with huge value.
No other car has ever done that, or even tried.
#2: Crowdsourced Energy
I happen to be in a bit of an outside EV area right now (Inland Empire) and the nearest supercharger is about 40 miles away. I also am staying at my in-laws and thus don’t have a high speed charger at home. If you use PlugShare, it has a feature that lets you search for individuals who share their chargers with people. Some of them charge, most of them don’t. Many people bring a bottle of wine or case of beer to share while waiting for a charge. There are numerous stories about people being in a strange town, unable to find a commercial charger and they share a charge with a stranger.
I think this is awesome and is a completely different way of thinking about how we power our transportation. I can easily see an AirBnB type situation popping up where there is no need for huge “electric” stations and instead people just rent out their chargers for $0.35/KWh or just ask for a cup of Starbucks in return.
One of the big concerns with EVs is that there’s no charging infrastructure… well… maybe that problem is already solving itself.
#3: Self-Driving (I mean driving assistance)
Ok. This feature gets a lot of coverage, but I have to list it. I was AMAZED at how easy and reliable this was and also how long it took me to get used to it (about 5 minutes).
I use it all the time, even on bigger local roads and especially at night.
On my first day driving  I was able to get an In N Out Burger (hey! you have to Christen it, right?) and eat the burger with BOTH hands while sitting in stop and go traffic on the 91. It was AWESOME. I am positive that all cars will be adding this over the next decade or so and there will be huge reductions in commuter accidents, stress levels and energy use.
I know other companies are working on it and I know Google has prototypes running around, but I literally did a double click and boom… the car was driving itself. There’s a few situations it didn’t deal with well, but generally speaking it was better at commuting than I was… and not by a little bit.
It’s ironic that the coolest feature about this car is that you DON’T drive it.
#4: Display
I don’t mean the giant screen… that’s cool… but I don’t look at it that much while driving. Why? Because the HUD is amazing. Why other cars haven’t solved these problems is beyond me.
The X gives you a real time collision map while you’re parking in your garage so you can see EXACTLY how far you are from all that random crap lying in your garage. Not only is it useful, it’s also really cool looking.
The GPS being integrated on the left side of the HUD is fantastic and it’s completely natural to use. It also flips seamlessly between GPS and other informational needs based on driving conditions. Everything from climate to music choice is intuitively shown in a minimalistic, easy to read display.
#5: It learns from you
I’ve had 2 or 3 incidents in the last week where the car tells me something.
It asked me to link it to my home network so it could get updates faster.
It noticed that I was in a certain location a lot so it asked if that was my home (and added it to my list).
This kind of slow onboarding and responsiveness is not something I used to having a car do. Cars are supposed to be dumb pieces of aluminum that do what we say. This is an entirely different way of thinking about what a car should be.
FINAL WORDS
I believe that what makes products successful is when they meet one of two criteria
1) They solve a fundamental problem that hasn’t been solved before (or as well).
2) They provide an experience that is meaningfully better than what was there before.
Few products do both. the iPhone was one, the Model X is another. I simply can’t imagine driving another car after a week in my X, and I suspect when the 3 comes out many hundreds of thousands (and potentially millions) of people will have a very similar feeling.
I was already pretty lazy and with the X I can be even lazier… so thanks for that!
I suspect the rest of the auto industry has noticed and they will have to substantially up their game. This will provide huge benefits in terms of safety, energy use and quality of life for many millions of people around the world in the years to come.
Well done.

Why I think America is a great country

~ Hermann P
It’s eternally popular in the United States to think that we are the verge of ruin.

Newspapers love to talk about it.

Politicians love to whine about it.

People with agendas can point out one problem after another.

Today, like any other day, it looks like we are on the brink of disaster and there is no way that we can possibly get out.

These people are wrong.

And when people look to the past to try and work out what the future should look like they are being short sighted and foolish. We should not seek to make America tomorrow look anything like America yesterday.

Yes. The founding fathers were really smart and great visionaries, but they also made tons of mistakes that have been corrected over the past 200+ years. In fact, their greatest contribution was that they knew they didn’t know everything and so they created a flexible and self-improving system. They could not even imagine the world today and would be mesmerized by what was built on their foundation.

Let’s look at a short list of things that America has overcome:

1) Revolution. We were a series of colonies run by the biggest and most powerful empire in the world. A comparatively rag tag group of “terrorists” were able to defeat that large empire in a brutal and protracted military engagement.

2) Country Construction. Other countries have done this, but very few have then subsequently formed a country that DIDN’T duplicate what they had just fought against. We DIDN’T crown a king. We DIDN’T end up with 13 different countries that blow each other up every couple of decades.

3) Slavery. Remember how slavery used to be legal? Remember how people would say if we got rid of it the entire economy would collapse? Remember how we fought a brutal civil war over it? Well… our nation survived that and it was probably the most difficult test in our history.

4) Child Labor. Like slavery child labor has a rich history in the US. And this isn’t ancient history. The final nail in the coffin of child labor was pounded in 1938. Now I know that there are kids who work and I’m sure there’s child exploitation, but it’s largely stamped out and a federal crime.

5) Women’s Rights. Remember when women were basically the property of men? Remember when women couldn’t vote? Remember when the entire idea of sexual harassment didn’t even exist. Well, it wasn’t until 1920 that the 19th amendment granting women the right to vote… something that would be unthinkable back in 1776.

6) McCarthyism. Remember when our country was locking people up for what they think? Remember when millions of people ran around believing that someone they know could be a spy for the Russians and that if we didn’t lock them up our whole country would be destroyed? Well… we survived that too…. and I know people see parallels with terrorism today, but it’s not even close to the same level… at least not yet. But we’ll survive that too.

7) Civil Rights. Remember the good ol’ 50s when it was totally legal to force black people to go to the back of the bus, drink from separate fountains, go to separate schools and not go into certain stores? Well… that’s gone too. And while racism is still alive and well it’s a completely different picture today. I see parallels here with the transgender issues today and I’m confident that will go down the same path… I just wish it didn’t take so much time and cause so much pain.

8) Cold War. Now we’re getting to something I actually lived through :). Remember when the world was going to be blown up at any moment? Thousands of nukes were going to destroy everything and the US was one of the countries that would be responsible for that. Well… we survived that, at least so far. Unfortunately there are still thousands of nukes out there, but I don’t remember seeing too many headlines that a massive nuclear attack is going to blow us up.

I could go on and on. I missed a lot. 2 world wars, the great depression, presidential assassinations, impeachment, getting off the gold standard, stagflation. Choose your poison.

TODAY’S PROBLEMS ARE NOT THAT BAD

Today we have climate change, shrinking middle class, destruction of manufacturing, rise of China, immigration, growing national debt, crumbling infrastructure, and so on.

I would argue that few of these problems rates as highly as the ones above, but they all seem much worse today. And I would argue that we are well positioned to respond to them, work out solutions and come out a better country because of it. Further, I think in 100 years we will look back and think “what the hell were those idiots thinking?”

And that’s the point.

We MUST look forward and create new solutions, not look backwards and pine for the past. That’s what makes America a great country… optimism and belief in the future despite the current environment of adversity and negativity.

Also, we underestimate the “Platform of America.” By that I mean that if you travel around the world what you notice is things like a reasonably stable rule of law, freedom to say and think what you want, the right to representation, due process, access to clean food and water, low crime rates, low infant mortality, support for education and entrepreneurship are NOT free and broadly available. Any person living in America is inside of a incredibly powerful platform that each of us can build upon.

That’s rare in the world today, and much rarer in history.


WAIT A MINUTE, ARE YOU SOME KIND OF BLIND PATRIOT NATIONALIST

Not at all.

America does and has done many terrible things, especially when we operate abroad. One of my biggest problems with America is that the way we act and behave outside of our borders is often the exact opposite of what we do inside. I wish this wasn’t the case and I hope in the future we can really become an exporter of certain fundamental principals that I think need to be universally available and aren’t.

We need to stop supporting dictators. Period.
We need to stop financing the toppling of democratically elected leaders.
We need to be opponents of the things we wouldn’t tolerate internally both in action and in speech. And I don’t mean fighting stupid wars, I mean supporting international frameworks that will transform the world in a positive way.
We need to provide our citizens health care.
We need to improve our infrastructure.
..and on and on…

America is a deeply flawed country that needs to do lots of work. And we’ve also done many terrible things which we can never pay back.

I’m also not saying “America is the greatest nation on earth.” Those statements are silly because there is no great basis of comparison. There are many great nations in the world and we can all learn from each other… but I DO think that America has one of the best systems for doing exactly that.

I’m also not saying that America will always be the #1 super power or the richest country etc. The future is unknowable and countries tend to grow and shrink all the time. The UK was once the biggest empire in the world, as was Spain. No longer. But I’d argue that the UK is also still a great country and has been around for many centuries longer than the US.

DON’T LOVE IT OR LEAVE IT… FIX IT

I often hear people say or imply that if you don’t love America, you should leave.

That’s cowardly. You should try to fix it and the people that tell you to leave because you don’t like something here miss the entire power of the American platform.

It NEEDS criticism, conflict, constant questioning, strong opinions and, unfortunately, even occasional violence, in order to be shaped, molded and improved.

The last thing we want is a country of people that are content with the way things are and if anyone disagrees with them they are invited to shut up or leave.

That’s anti-American.

We should invite difference of opinion, stand up for our beliefs, argue, debate… anything short of violence and over time I believe we will come out with a better system… at least that has been the trend.

LOOK TO THE FUTURE
When I look at the past and present, makes me look to the future.

The solutions to today’s problems will not be found yesterday.

Slogans like “make America great again” are looking at things the wrong way around. There are things that ARE great today and things that aren’t. So lets figure out how to make the things that aren’t great better instead of trying to rewind to clock to some historical fantasy that didn’t and won’t exist.

Let’s build on this amazing platform and improve the world for ourselves, our children an our fellow humans of the earth.

If you disagree and think th

I don’t know about everyone else but I am optimistic that when I die the world will be a better place than it is today, and it’s up to all of us to make sure that happens.

Family Vacation in Northern Bali

~ Hermann P
Hi Guys.

As some of you may or may not know… my family and I are spending a month in Bali. We chose Bali for a number of reasons I won’t detail here, but we chose North Bali in particular for a few reasons:

1) It was supposedly not as touristy. We aren’t huge fans of large integrated resorts, drunken tourists and being accosted by people selling junk every 5 minutes.

2) Cheaper. As luck would have it (1) means that you will spend less money.

3) More “real.” My personal opinion is that if you are visiting a foreign country and then go out of your way to make sure it resembles your home country as much as possible… you’re doing it wrong :). Again. Personal opinion. You can take your vacation however you like.

GETTING HERE

Getting here was both easy and hard. For one thing, we are combining vacation with moving, which means that we have 10 boxes and suitcase with us. So we have to consider that with travel arrangements.

The flight from Hong Kong to Denpasar, Bali was uneventful and reasonably short (5 hours). Ok… short for people who are used to 14 hour trans-pacific flights.

Once we got here, we got our bags, met our drivers (one for us, one for our bags) and began the 3.5 hour commute to the house we rented. I want to point out that it’s a 3.5 hour drive and it’s 70 km so that gives you a sense of the kind of road quality and traffic you encounter driving around here :).

Both kids threw up a couple of times and there were points in the drive where we were thinking “what the hell did we do here?”

Once we got to the town we are staying in, the roads got better but it turned out the driver didn’t know EXACTLY where the house was. I had it on GPS (coverage here is amazingly good) and so we were able to find it. Here’s a couple of pictures to give you an idea of what the road looks like.




The second image is the narrow dirt road that leads to the parking for the house. When it’s 10PM it’s quite a bit more rickety and gives you that “there’s no way in hell this is the right place” feeling.
Well, it was the right place.
We got in, got settled, cleaned up some puke and went to bed.




EXPERIENCE SO FAR
Ok. So the drive was a bit rough, but other than that things have been great.
Here’s a panoramic shot from the back yard.
It’s pretty breathtaking.
There are a few negative points.
1. Humans think the world is their personal garbage can.
Because of the increase in population/tourism and the challenges of investing in infrastructure, the beaches have tons of garbage on them. Of course fancy houses for tourists have people who clean the beaches for you, but you can look 100 feet down the beach and see what the average Balinese person sees. The contrast is striking, and unsettling. Diapers, plastic bottles, potato chip bags… people are huge trash generators.

2. There is no “quick trip” to … fill in the blank.
Leaving the area is at least a 20 minute drive. Period. Walking is pretty much out of the question because it’s at least a 1 mile walk just to get to the main road, it’s really hot and the you’re walking through slightly tamed jungle. That means any trip requires calling a driver in advance and taking at least an hour. Needless to say, we haven’t done many :). It’s not uncommon to see a family of 4 with groceries on a moped… and usually the kids don’t have helmets. You do what you gotta do.
3. People are poor.
Not really a negative per se… but unlike fancy integrated resorts with giant walls that keep the “riff raff locals” out, we are right next to the locals and so it’s very obvious how different the standard of living is.


BALI FOR THE KIDS

For the kids, of course, none of this matters at all. We have a really nice woman named Ayu who takes care of cooking and cleaning. I enjoy doing dishes and cleaning up so I think her work load is pretty light. I get the feeling that seeing me wash dishes is a bit odd for her… but that’s ok.
She has 3 girls: 2, 5 and 7 and they have now come over almost every day to play with Lily. Despite Lily not speaking Bahasa (or any native language) and her kids not really speaking English… they somehow have no problem playing together for hours and have become close friends very quickly. Lily is very sad when they go and asks every morning when they will come back.
They build sand structures for hours, play with toys, run around the yard, look at the bugs and so on. I think we can learn a lot by watching children interact. Lily just immersed herself immediately and wasn’t troubled by any of the differences…except maybe food, but that’s kind of typical for young kids anyway.
For Alex it’s a bit different because he’s still so young (under 2). Mostly he runs around naked and goes in the pool. He DID jump into the pool on the first night which gave us a fright and him a healthy respect for deeper water. Since then he hasn’t fallen in or tried to jump… so I guess that worked :). From what I can tell he’s having a blast.
LOCAL SHOPPING

We have gone grocery shopping twice. The first time to get basics and to get a sense of things and the second to stock up more deeply. The interesting experience was the local market. Here’s a few pictures:





















































Now I have to say… this was a REAL local market. By that I mean it was a “why on earth is the white guy shopping here” kind of place. Some of the smells were powerful, but there was a huge selection of fruit, veggies, fish, etc. and we were able to load up on stuff for a reasonable price. I have no idea if we were getting “ripped off” but if we were, it was only in relative terms and I have no problem contributing to the local economy.
I was very thankful that Ayu came with us and could show us where to go and what to look for. My wife is also incredibly good at picking out fish, fruits and vegetables and has no problem getting her hands dirty. It was an awesome experience and I think it would have been harder to get if we had stayed in a more touristy area.


UNEXPECTED OBSERVATIONS

On the 3rd point above. EVERYONE we’ve run into is super friendly and doesn’t really seem to care about the obvious wealth disparity… at least not yet. I’m sure there are people who are annoyed that their once pristine and open beaches are now dotted with big houses rented to foreigners, but I haven’t felt any of this. Also, there are almost NO people trying to sell you stuff here… and when they do, it might actually be worth buying. No $5 made in China Buddha statues, etc. We did buy some peanuts and there’s an old woman selling hand made wrist bands every morning.
It’s mostly fisherman and their families trying to scape together a living.
I did talk to a guy who has lived here for many years and he related that while some things are better (health care, roads, utilities) the cost for the average person here has gone up much faster than the wages (sound familiar) and he’s really worried that the increased cost of living will be a big problem for his children.

My gut is that over the next decade or so the area along the coast will become more “rich expat rental homes” and then eventually “large integrated resorts” and the people that live in shacks along the beach making a living as fishermen will be relocated elsewhere. That’s really sad to me. I wish that the local population could benefit more directly from those kinds of developments, but it doesn’t seem to happen this way.
So I’m glad that we were able to see this area before it gets to that point. And even though I feel some guilt in living in such comparative opulence, I prefer being able to spend at least much of my vacation money directly on the local economy rather than giving it to a resort.
It’s also a lot cheaper when you are inconvenienced. Since I can’t just pop down to a fancy restaurant we tend to cook and eat at home… and we tend to eat what we have. We also tend to relax a lot. Since there isn’t 24/7 catered entertainment, we play hide and seek, make friends and talk to locals, lounge in the pool, etc.
It’s been great so far.

How AI will force us to confront our purpose in the Universe.

~ Hermann P
RISE OF THE MACHINES

AI is a hot topic these days.

Everything from self driving cars to robotic surgery seems to be making headlines.

Along with the amazement of an automated future, something troubling has simultaneously arisen.

If AI can do everything humans can do, but better… what do the humans do?

Many articles discuss how humans will potentially become more creatively focused, we will awaken our intrinsic motivations instead of constantly focusing on extrinsic rewards. Switzerland is voting on a referendum to give every citizen $2600/mo tax free. While unlikely to pass, other cities are already experimenting with the idea of “basic income.”

Those experiments and ideas are not directly related to AI per se, but they do reflect a long term trend in machines taking over work from humans.

What started in the industrial revolution in manufacturing has slowly been swallowing up more and more work. This shows up as a general term of “efficiency” but I think what it really represents is replacing human effort with non-human effort.

Whether, and to what extent, this is “good” or “bad” is subject to interpretation. On the one hand having a machine that can harvest corn is far more efficient than having hundreds of people doing it by hand. It also frees those people from the repetitive and uncomfortable job of harvesting corn by hand. However, if your life is dependent on you harvesting corn by hand, this replacement is a mixed blessing at best.

THE SPEED OF REPLACEMENT

Something that makes these transitions even more painful is that they tend to happen quite quickly. In the US, for example, we have seen the manufacturing workforce shrink in size and reduce in costs while increasing output. This happened within a few decades leaving many millions of people without a way to replace the income they had from the previous occupations, regardless of how dangerous, repetitive and unrewarding they may have been. One could argue that there are people who genuinely love this kind of work, but I suspect for most it was a comparatively good income that was the main attraction.

It’s easy to come up with simple and cavalier solutions.

Free from the toil of tedious manufacturing work, they are free to train for new, more exciting positions. But practically how does this work? Without the income from the previous job how does one pay for retraining? And even if one had the means to retrain, how will one find the time while having another position to keep one’s life going? And of course there are the legion practical difficulties of relearning something late in one’s career.

We can also take the position that market forces will work this out. Sure, a few people will be victims of technological progress, but from a broader social point of view, it’s a small price to pay. Well… maybe.

THE BREADTH OF REPLACEMENT

Up until now, technology has primarily focused on replacing physical jobs. Almost all technology from the industrialization period on (and before) have focused on replacing physical human effort with machines. The wheel, the lever, the printing press, Railroads, automobiles and trucks, robots on assembly lines, and so on have slowly replaced humans, even as the work moved from country to country as companies chased low cost labor as a way to compete with each other.

The rise of the machines has been relentless, rapid and broad.

With AI though, the replacement could be much broader. It could start to include so-called “knowledge workers.” People like meteorologists, lawyers, real estate agents, doctors, financial advisors, pharmacists, programmers etc. may find themselves increasing replaced with semi-intelligent learning machines. Beyond that more “complex” jobs such as drivers, pilots, and soldiers may find themselves replaced by more comprehensive and cheaper robotic alternatives. Indeed, the idea of replacing drivers was unthinkable even as little as 10 years ago… now it seems almost certain.

These are no longer physically demanding and grueling jobs… these are the so-called “good” jobs that humans are “built for.”

But if we replace all of these jobs with cheaper, more efficient alternatives, what should those people train to do? Is there something beyond “knowledge work” which humans are better at that is even more desirable and rewarding?

GOING EVEN BROADER

Ok. So maybe further down the line we become a species of creative expression and invention. No longer limited by physical needs or even mental needs we can essentially “do what we want.” Putting aside the economic problems that this may spark, let’s imagine what this may look like.

Perhaps people can focus on music or painting or sports or invention. Personally rewarding, creative and entertaining pursuits that still give personal meaning as well as social value.

But what if the machines can do that as well?

What if an AI can compose BETTER music, paint a BETTER painting and play a BETTER game of basketball? What then?

What if we develop an AI that can find the cure for cancer? Or figure out how to colonize Mars? Or how to travel faster than light?

What if in a few hundred or a few thousand years we just watch in awe as our creation grows far beyond our wildest dreams?

And why wouldn’t this happen?

The incentive for making the best is what drives this from it’s origin, isn’t it?

If machines are better at the physical, and then better at the cognitive, why can’t they also be better at the creative?

I think they can, and I think they will.

INVERTING THE PROBLEM

So I think it’s worth turning this around.

Why are we making these machines at all? Is it to make life “better.” Better for whom? And what is better exactly? Less toil? Less suffering? Less pain? Is it about making things easier and safer?

Is it for our continued survival as a species?

Ok. Let’s assume that’s true… once we’ve checked off “survival” as a goal, does it become about maximizing comfort and satisfaction?

But again, we must face the eternal why.

Let’s imagine an absurd world where an army of perfect robots can provide us with every need, solve every problem, advance technology faster than we ever could and, more importantly, improve itself FASTER than we can improve them. And let’s imagine that their sole purpose is to fulfill our human desires.

What does that world look like?

If the end result of our current trajectory is to lead a life of leisure and consumption, why should we exist at all? Beyond the pure personal experience, what is the difference between living a life of pure indulgent consumption and living no life at all?

Don’t get me wrong… people could and would still fulfill their desires. They could still paint and make music. They could still program and tinker with new technology. All that would be completely possible, but it would make as much difference to the AI robots as a group of ants collecting chips on the floor.

SO WHAT *IS* OUR PURPOSE IN THE UNIVERSE?

Well… of course I don’t know, and neither do you.

Perhaps there isn’t one. Perhaps “purpose” is the evolutionary requirement in our minds to keep the species going. It’s what causes us to behave in the ways we do, invent the things we invent in order to keep the genes passing from one generation to the next; building up to the next evolutionary leap.  Perhaps that illusion is so deeply implanted into us that we can’t escape it even if we are completely aware of it.

Perhaps we are just one dot in the chain of evolution and once we replace the slow, biological evolutionary advances with the more rapid and exponential technical ones… we will have served our purpose and, like the dinosaurs before us, we should be eliminated to make way for another species to have it’s chance.

And maybe that is purpose enough.

How rich people get richer and why inheritence is anti-capitalistic.

~ Hermann P
THE STORY OF PAUL AND PAULA
There are two young people at the beginning of their careers: Paul and Paula.

Both finished school with no debt, live within their means and have identical spending and saving habits. Both have annual income of $100,000 (I know, it’s high, but it’s easy to do math on 100 vs 55 so bear with me).

Paul and Paula are quantum entangled and as such over the next 40 years they both experienced exactly the same things: they married at the same time, had children at the same time, endured identical medical problems, and had duplicated investment returns. In short everything was exactly the same, except one thing…

Paula derives her income from work, whereas Paul derives his income from a trust fund.

We’re ignoring, for a moment, the implications of this difference… more time, less stress, access to health insurance, 401ks, and on and on. We’re going to pretend that all of that is equal although I would contend that the inherited income has far more financial benefits than the earned income.


WHAT HAPPENS – THE MICROCOSM
It’s April 10th.

Paul and Paula are both procrastinators and so they are scrambling to do their taxes.

Both have fairly simple taxes at this stage in their lives. They are single, have no children, and do not own a home. They also live in a state with no income taxes and so their procrastination will not be a major source of trouble.

Paula has a W2 from her employer but no other sources of income. Paul has his investment income but no other source of income.

Let’s see how their taxes compare.

With no other deductions, sources of income or write offs, Paula will pay $18,553 of taxes… roughly 18.5%.

Paul on the other hand will pay roughly, $7,979 on his $100,000 of qualified dividends.

Now, I KNOW that of course it’s never this simple; but bear with me.

In terms of monthly cash flow, Paula has $6,787.25 whereas Paul has $7,668.


HOW DOES THIS IMPACT SAVINGS?

Continuing the story, let’s look at two scenarios.

In Scenario 1, both save 30% of their post tax income and adjust their cost of living appropriately.
In Scenario 2, both have the same cost of living, $4000/mo, and save what’s left over.

Here’s how that looks:

This demonstrates two things.

1) How big of a difference in savings it makes if you save a large % of your income and then adjust your cost of living.
2) A lower tax based due to source of income has a dramatic impact on savings rate if lifestyle is equal.

In other words, if your source of income is from an inheritance, you can have a much higher savings rate while maintaining the same quality of life as someone who has to earn their income via a W2 based job.


HOW THIS GROWS OVER TIME

I’m sure everyone understands the basic concept of compound interest, but it’s always fun to visualize.

So let’s say both Paul and Paula are going to work for 40 years, invest their money in a boring 70/30 stock/bond index fund (insert pitch for vanguard here) and they had a reasonably modest 4% inflation adjusted return over that time period. After that 40 years they both plan to retire.

How did that turn out for them?

Here’s a chart showing annual savings as well as accumulated net worth based on the fixed $4,000 monthly spend scenario:

PAULA’S DATA
PAUL’S DATA

Paula’s accumulated savings are $3.17 million whereas Paul’s are $4.18 million, just under 25% more.

POST RETIREMENT LIFE
So now they’ve retired. Paula has a very respectable $3.17 million saved and Paul has a somewhat larger $4.18 million saved.
Both of these are incredibly good scenarios and well beyond what most people end up with after 40 years of work which shows how important the forces of consistent savings and avoiding bad luck are.
That said, let’s assume both Paul and Paula believe in the 4% rule and start withdrawing 4% of their savings over the next 25 years. They also will continue to get a return on their savings of 5% per year.
Since they are connected through some bizzaro human quantum entanglement they will die on precisely the same day 25 years after they both retire from work.
At the end of those 25 years, Paula’s assets are $3.88 million and Paul’s are $5.06 million… quite a bit more.
Additionally, Paul spent a total of $4.61 million (164k/year on average) while Paula spent “just” $3.5 million (140k/year on average).
That means that when they die, in addition to having significantly more to spend during his retirement and not needing to have income from a job, Paul ALSO gets to leave considerably more to his heirs.
BUT WAIT THERE’S MORE
Consider… we didn’t even include Paul’s initial trust of a few million to provide him with the 100k income over those 40 years of work.
Let’s pretend that his trust did just well enough to pay him 100k/year, matching Paula’s income, but nothing more. Applying the 4% rule in reverse, we’ll assume that this amount was $2.5 million (100,000 / 4%)..
Let’s further assume that Paul gets the $2.5 million from his trust fund the day he retires, and we add it to his day 1 retirement pool of.$4.1 million.
How do things look during and after Paul’s retirement?
In a word, not bad. Paul now has $8.09 million at the end of 25 years of retirement while also being able to spend $7.35 million (an average of 294K/ year).

That means in addition to spending more than double what Paula spends in retirement, he will also have two and a half times more money to leave his heirs.

Not a bad deal for being born lucky.

CONCLUSION

If you inherit enough money that it pays you investment income that is similar to a full time job, you get MASSIVE benefits… like my dad said it’s like playing monopoly with twice the starting money and 4 dice instead of 2.

Now I’m not saying that investment income should be taxed like regular income, because I understand that within a single lifetime that amounts to double taxation and would be a pretty brutal (and I think unfair) hit on retirees. That said, I do believe that inherited wealth is somewhat different. Specifically I think the “luck” factor in inheritance is significantly higher than the “luck” factor in saving diligently, having a successful business, etc.

Additionally, if you multiply this effect over generations it’s obvious that it acts to concentrate massive amounts of wealth in the hands of a few people. Those people will not be able to spend the money efficiently in order to ensure the economy keeps moving, technology improves, innovation is spurred etc. Instead they are likely to hoard and stagnate the flow of capital. That is VERY bad for capitalism and society.

I don’t have a single, simple solution, but I do think that society needs a fairly comprehensive way of preventing those things from happening. One way, of course, is to have an incredibly “progressive” estate tax, which is what Bernie Sanders is suggesting. Assuming that it isn’t “game-able” by extremely wealthy people… and that’s a big assumption… that would either redistribute their wealth more evenly or encourage them to use it/give it away before they die.

I personally LOVE “The giving pledge” and think it should be extended to include people other than billionaires.

It does bring up the challenge of trying to decide who/how the money should be distributed, but I think almost any system is better than the ovarian lottery.

Two of the most powerful productivity tools.

~ Hermann P ~ 1 Comment
I’m going to let you in on a secret. I’m a terrible procrastinator and I am riddled with guilt about it.
I have lots of ideas and never realize them.

I have lots of goals and never achieve them.

I am incredibly envious of people I know that are super focused, highly productive and just seem to do it all the right way while I flail around like a fish in a rowboat gasping for air.

I’ve tried to get better and continue to, but it’s rough and slow going.

So dark side out of the way, I want to introduce you to two of the most powerful tools I use every day and they’ve helped quite a bit.


1) The  Text Notepad

I use “notepad.exe” on my laptop, but you can use whatever you want.

I tried them all, evernote, virtual sickies, tasks in google calendar, etc etc. None of that worked nearly as well as my notepad.exe blank text file.

What’s the structure?

Simple, I type the date at the top and then I have a list of stuff to do.

Every morning before I do ANYTHING, I crack that baby open and spend at least 10-15 minutes planning out what I want to do.

I order it first by “thing I want to do least.”

That’s different than the most important thing method or the easiest thing first method or many other methods. The reason I order it this way is because stuff I HATE doing tends to occupy huge amounts of brain power while it ISN’T being done. This is usually mundane and unpleasant work. You KNOW you have to collect that tax information. You KNOW you have to send that rejection email. You KNOW you have to have that unpleasant conversation with that person.

We delay those things for a long time and while we delay them they act as a tax on EVERYTHING else. So I try to kill those first.

Next on the list is stuff that is time critical/easily actionable. There is sometimes overlap between stuff I dislike and easy/critical/annoying things (say, buying airline tickets or sending meeting notes). I also like to “chunk” those things together so that I spend 30 minutes on things like responding to meeting invites (or cancelling them), planning a trip, typing up interview feedback, and so on.

Then I try to pick one (or maybe two) things that require more focused energy and should be the major contributors of value for the day. This is something like finishing a presentation. If you’re an engineer/artist/etc and not a “manager” it’s stuff like finishing a feature or completing a piece of art. It’s important that the end result is “finished” in some way. I’ve also found that limiting how many I allow myself to do reduces distraction, switching cost, anxiety and many other things that dramatically reduce my effectiveness. I allow myself the freedom to NOT do most things on most days.

And finally is the “fluffy” stuff. Things like “test out that new game engine” or “try to visualize that data in an interesting way” or “read those cool HBR articles people have been sending around.” I tend to find those things to be the most fun to work on and they can act as “rewards” instead of “distractions” if I leave them till the end.

OK. On to tool #2


2) The 30 Minute Timer

Again, I’ve tried lots of high tech solutions here.

My favorite. Go to Google.com and type in “30 minute timer.”

That’s it. Away you go.

I try to put tasks into chunks and spend 30 minutes on them. I try to do NOTHING else. I try to forbid myself from reading news, email, text messages, etc. I try to shut it all down except the window that I need for the thing I’m doing and the timer window.

I commit to making EVERY task be 30 minutes long. This is weird, but the reason I do it is because I found myself wasting a lot of time trying to “guess” how long things would take. Worse, my guesses were both totally wrong and usually irrelevant. By taking out the time and energy required to estimate things I actually make much more progress and am much less likely to procrastinate doing the task to begin with. Even writing this blog post was done in 30 minute increments… although it took about 5 of them.

If I finish early, I either take the next chunk of tasks or I take a break.

If it takes longer I quickly decide if I want to commit another 30 minutes or not.

It is AMAZING what can be done in 30 minutes if I remove all distractions and just focus.

It’s also amazing how much better the day is when I start by getting those horrible things I hate doing out of the way. It’s sort of like being in a room that is clean and organized vs being in a room that you are dreading to clean and organize. Same room, different feeling. So my approach is to clean the room, THEN do the work.

So that’s it!

I’m happy to write about things like how to write tasks in a way that makes them actionable, how to segment things into time chunks, how to fight distractions, etc. if there’s interest.

Please let me know what you’ve tried to increase your focus and productivity.

Simple, cost effective long term retirement plan for your kids.

~ Hermann P ~ 2 Comments
NOT A GENERAL POST ON INVESTMENT ADVICE
I haven’t posted much about investment. I think about it a lot and I research it a lot, but it’s such a tricky subject and so open to interpretation. Also, there is TONS of good (and tons ^ 1000 of bad) investment advice around.

That said, this is one piece I feel really strongly about.


SHORT AND SWEET

I’m not going to spend a lot of time on investment theory, tax optimizations, transaction fees, inflation, value of advisors and the thousands of other topics broadly discussed.
I am going to make one, simple, specific recommendation that I’m doing myself.
Here’s a step by step list:
1) When you have a newborn (or if you currently have a child). Open a simple trading account for them. ETrade, Ameritrade, Interactive Brokers, Vanguard, Schwab, whatever.
2) Put $5000 into it. (or whatever you can somewhat comfortably afford… but 5k is a really good number)
5) When your kids turn 18, convert it into an IRA (or some other tax deferred vehicle, if its possible).
6) Try to figure out how to not have them or anyone else touch it until they are 65 (or whatever normal retirement age is).
7) When they have kids, have them (or yourself) the same thing.
That’s it. Set it and forget it.
I wouldn’t rebalance. I wouldn’t dollar cost average. I wouldn’t track it. I wouldn’t tell my kids about it (until I have to). I wouldn’t include it in any budgeting, etc.
Why?
Because activity and information lead to decisions that work against the long term potential here.
If you’re satisfied or totally dismissive, read no further, if you’re not, read on.

RATIONALE

INVESTMENT PERFORMANCE
Over the very long term, small cap beats all other types of investments. The ride is rocky. Timing is impossible and you can’t possibly do this for money that you will need even over the next couple decades. But over 6 decades it’s likely to produce fantastic returns… as long as you don’t mess with it!
Google all you want. Read all you want. Study all you want. Historically over very long time periods… small cap value just crushes face. That won’t help you if you’re 40 years old and need to retire in 25 years and need a 15% compound return. But if you are 2 and have a 63 year window, and a modest amount of risk capital; It’s as close to risk free as it gets. Since my 2 year old can’t make investment decisions about their retirement 63+ years from now, I’m making one for him.
THE ENEMIES ARE INFORMATION AND ACTIVITY
We love knowing how our investments are doing. Day to day, Hour to hour. Minute to minute. We want to research, we want to tinker, we want to beat the S&P. We think we are smart.
This is not the point here. If I could erase the knowledge of these accounts from my mind (and my child’s mind) and then when they hit the age of 65 (or whatever) they wake up with recall… that’s what I would do. Knowing how these accounts are doing and ANY activity puts the strategy at risk I am not even going to rebalance. The ONLY thing that would make me conduct any activity is if something like Vanguard went bankrupt or got bought or something and I was forced to take some kind of action. Then I’d try really hard to find similar low cost, small cap diversified investment vehicles and reinvest with whatever the asset allocation happened to be at the time.
I can FEEL people talking about how this isn’t optimal for risk management, etc. That’s not the point. I’m optimizing for psychological behavior of myself and my kids. We are short term rationalizing beasts. This strategy is in response to that.
THE SIMPLE MATH
OK. Here’s the exceedingly simple math.
Let’s say you have a baby and you do the above. Historically (since 1930) the small cap value return is 15.4%. If you compound that over 65 years, the result is?
$55,251,945.86
That’s right. doing absolutely nothing else at all, your 65 year old child retiree will have 55 million dollars. Granted. Inflation will chew at the value of that it will double and half many times. It will go through world wars, terrorist attacks, presidential assassinations, and technological changes you can’t imagine. It might not even survive if the whole country collapses. But then, what investment will :).
Now let’s be more pessimistic. At 8% it’s only $743,899. That’s a LOT less, but better than a hole in the head. At 11% it’s a still respectable $4,415,334 .
By leveraging both global and US specific companies in this area I believe my kids will be well served by this trend as the world globalizes or (galacticalizes?).
Basically I give them partial ownership in the global collective of small, innovative, relatively “cheap” businesses around the world over the next 6 decades. I choose Vanguard because I believe as an investment company they are likely to be around a very long time and they don’t charge huge fees or try to be too smart.


IMAGINE YOUR OWN FUTURE OR PRESENT
There are lots of headlines today about seniors who are scared of retiring. The reasons are very real. Failing or inadequately funded pensions… and in many cases no pensions at all. Potential threats to social security. Inadequate savings. Bad investment performance. Fees taking too much away. Etc etc.

I don’t want my kids to face this. Nothing can guarantee that, of course, and ultimately I hope they are helpful, engaged and productive members of society. But I think many helpful, engaged and productive members of society face this terrible future as they age. Sometimes of their own making, sometimes not.

GREAT ARTISTS STEAL?
This is a blatant copy from an idea by a senator named Bob Kerrey in the 1990s called KidSave. I really liked the idea when I heard about it. It was simple. Each newborn child gets $1000 from the federal government put into a savings account managed in the same way the “Thrift Savings Plans” are managed (to avoid “professionals” taking their cut as much as possible). Then for the first 5 years of the child’s life, the $500 (or whatever) child tax credit would go into that account. It’s impossible to withdraw those funds until the age of 65 and they are tax deferred. At 8.5% it was projected that each child would retire with over a million dollars. At four million births per year, that is a four billion dollar government program that essentially wipes out retirement problems forever.

I don’t think it would have worked as planned because the size of that pool of money would have created all kinds of nefarious and unethical practices by public and private sector institutions. And, of course, it requires that the country continue to grow and be successful… but so do all other alternatives. But that doesn’t matter. We can recreate the basic concept.

CONCLUSION
It’s simple, when it comes to compounding interest time matters MUCH more than amount. As a really crazy example, let’s say you go back to the year 0 and invest 1 penny at 3% interest. 2,000 years later you have $472,551,787,558,269,000,000,000.00. Of course, that’s impossible to actually have but it illustrates the point. Small sums over huge periods of time result in big numbers.

Also, please don’t forget to make sure your kids pass that on. The goal isn’t to create vast, indefensible dynastic fortunes. The goal is to promote a simple system that relieves a very basic and fundamental human problem.

Let me know what you think!

How to improve critical thinking: Inversion.

~ Hermann P ~ 1 Comment
INVERTED THINKING

The idea of inversion was introduced to me by a guy named Carl Jacobi. I heard the quote “invert, always invert” and thought it was a great concept so I dug around to find out who said it.

For a great article on using inversion to solve real problems, you can read this post. If you don’t want to bother the summary is that the problem of trying to keep B17s from being shot down during WWII was looking at bullet patters on the planes that returned and then extrapolating that where there were NO bullet holes must be where the planes are weak (because the weak planes didn’t return).

This is classic inverted thinking. You look at information from the opposite point of view. The absence of data can be more meaningful than the presence of data.

Why is this hard?

Many things work against this kind of thinking. The most obvious one is that we have WAY too much information around us… so it’s unlikely that we will get through this information and find our way to the non-information.

Another reason is that it’s much more difficult mentally. If I show you a pretty graph with nice pictures and well stated text your natural thinking process attempts to understand what is being said. Only afterwards and with much deliberation will you consider what is NOT being said. What we can see overwhelms our mental processes making it very difficult to contemplate what can not be seen.

Why is inversion valuable?

I am a firm believer that value and difficulty tend to be related. Inverted thinking is valuable because it is hard. Because it is hard, less people do it less frequently and thus the insights it can provide are discovered with less frequency. Therefore it pays to practice it on things that aren’t that important, just to get the knack.

I also think it’s valuable because it forces you to look at things in a much clearer way. It tends to be “unnatural” and a bit ridiculous to invert some things… sort of like a child constantly asking why. And yet. It can be really enlightening.

OK. How can I practice?

Well… it’s actually not that hard to do. I’ll take a few contemporary examples.

1) It believe Donald Trump is a self-serving bigot who should never be president.

OK. That’s a sentiment I hear a lot these days. Let’s invert it… and see what happens.

Step 1: Inversion: Assume I believe that Donald Trump is a giving uniter who wants what’s best for people and would be a great president.

Step 2: What would have to be true for that statement to hold? What would I have to believe that I don’t? What would  I have to assume is true that I believe is false?

This forces me to take a position I don’t hold and then imagine myself believing something completely different. That’s the first step to understanding an opposing point of view which is one of the benefits of inverted thinking!

Inversion can be used in goals as well!

2) I want to lose weight and get in shape.

This is a pretty popular and valuable goal that few people attain. Let’s invert

Step 1: I want to get really fat and out of shape.
Step 2: What do I need to do to accomplish that goal? Eat all the unhealthy food I want. Lead a sedentary lifestyle. Avoid the discomforts of physical activity.

That gives me a nice list of things that I would do if I wanted to get fat. That may seem obvious, but I think that when I make that list I find that a lot of it is about delayed gratification and discomfort. Thus, I could conclude that if I want to lose weight and get in shape, I must embrace discomfort and instant gratification.

That’s quite different than buying exercise programs, a gym membership and fancy workout clothes.

Conclusion
So next time you find yourself thinking something that is obvious or seeing something that you are trying to understand, practice inverting it. Why is there rush hour traffic? Why do we pay $5 for coffee? What causes cancer (Mole rats never get cancer)?

Those are all questions that you can practice inversion on.