THE FINANCIAL PHILOSOPHER

Rationality & Prediction: One Year Later

"Those who have knowledge don't predict.  Those who predict don't have knowledge." ~ Lau Tzu

Extending upon the recent discussion here on rationality, let's revisit one year ago today, October 6, 2008.  The stock market was in free fall, declining nearly 10 percent in just five days, and the herd reaction was panic.  As I think back to my own emotional state, I believe mine was also panic... but not for the same reason as the herd!

My panic was that others were panicking!  My attempt to remain rational and orderly amidst irrationality and chaos may just have been, well, irrational!  This hindsight observation begs the question, "When is it best to follow the herd and when is it not?"  This may be the most common question on the minds of almost every investor, trader or asset manager when making investment decisions or giving recommendations, especially during extreme volatility.

If you are interested, feel free to read my blog post from exactly one year ago, Reasons Not to Sell Stocks Now.  If you don't care to read it, here's the synopsis:  As the herd was running for the exits, I was hyper-intentionally resolved to maintain my cool-headed contrarian stance.  I can now admit that, in frustration, disgust and a bit of haste, I made the one and only "prediction" on this blog, which was that stock prices, as measured by the S&P 500 would close higher one year later and would even outpace the average money market fund! 

What are the results of this prognostication?  The S&P 500 closed one year ago, October 6, 2008, at 1056; yesterday (technically one-year later) it closed at 1040; and today, October 6, 2009, the S&P peaked intra-day at 1061 and finally settled at 1055, just a one point below its year-ago mark!

Of course, at the time, I didn't imagine how bold this prediction would appear, especially as the S&P 500 fell another 40 percent lower by March 9, 2009!

"There are no facts, only interpretations." ~ Friedrich Nietzsche

Those of you who have read this blog for long, know that I do not believe in making (or acting upon) predictions. 

Without getting deep into a semantic analysis, one may argue that any action taken based upon an expected future result is a form of prediction.  While this may be true, I should qualify my previous statement against prediction by saying that, in general, I believe it to be foolish to forecast an outcome that may be significantly influenced by the whims of human emotion.

On a lighter note, I can't help but think of some advice someone gave me with regard to emotions and personal relationships:  "Would you rather be right or happy?"

This advice seems to work well with investing and financial markets, wouldn't you agree?

The Rhyme of Irrationality

"Man has the power to act as his own destroyer -- and that is the way he has acted through most of history." ~ Ayn Rand

I recently ran across a few articles that got me thinking about irrational behavior, especially with regard to the key players (politicians, the federal reserve, big business, and the investor herd) in financial markets.  Each article is worth a read; however, I will provide the key takeaways and then follow with a few of my own thoughts, which will hopefully provoke your own:

Predictably Irrational: How Investors Frame Decisions:

• Author of the popular book, Dan Ariely, shares some of his observations from research in the field of behavioral finance at a recent industry conference for investment advisers.
• Ariely says, "Your brains are fooling you in a repeated, systematic way, and they are doing the same for everybody."
• The abundance of choices increases complexity and decreases the brain's ability to make good decisions -- the process of investing (selection, monitoring, buy/sell decisions) is rarely simple, yet decisions are made quickly.
• When decisions affect events further in the future, people act more rationally.  As time frames shorten, temptation plays a greater role and decisions become more irrational.  Ariely calls this "hyperbolic discounting," which explains why people don't save, diet or exercise -- the rewards of immediate temptations are valued too greatly.
• To overcome temptation and other related and irrational behavior, investors (and their advisers) should create binding contracts that anticipate temptation and provide details for rational reactions, such as re-balancing a portfolio in the midst of large swings (up or down) in stock prices.

Can Irrationality Be Rational?:

• Blog author, Barry Ritholtz, of The Big Picture, comments on a recent New Yorker article, titled Rational Irrationality, which discusses "the real reason that capitalism is so crash-prone."
• Mr. Ritholtz's take on the New Yorker article is that the author rationalizes irrationality, for example, on the part of big financial firms having little choice but to participate in financial bubbles or suffer by comparison to others who are profiting.
• This appears to Mr. Ritholtz as overlooking the consequences of a narrow short-term view.  In other words, how can one rationalize irrational behavior simply because others are participating (and profiting at the moment)? 
• Prudent risk management requires that a money manager or CEO go against the crowd at times of irrational exuberance and to exhibit objective judgment rather than herd behavior.

Why Capitalism Fails:

• The article observes recent interest in a somewhat obscure macro-economist, Hyman Minsky, who died over a decade ago, and whose studies predicted exactly the kind of financial meltdown we are experiencing today.
• In true bubble (and human) fashion, Minsky noted that periods of economic stability, as we experienced over the past few decades, would set the stage for monumental crises.  As Minsky observed, "Success breeds a disregard of the possibility of failure."  That success, of course, encourages borrowers and lenders to take on more risk and eventually a "euphoric economy" would develop.  Once this kind of economy develops, any panic, such as the failure of a large firm, would create a sudden economy-wide attempt to shed debt.
• This moment of panic, the watershed moment, would later become known as "The Minsky Moment."  Speculators and Ponzi borrowers would collapse first, followed by the remainder of market participants, even the more stable players.
• Minsky aptly named his idea "The Instability Hypothesis."  In the wake of a depression, he noted, consumers, businesses and financial institutions are all extraordinarily conservative.
• So, what now?  Minsky's solution, put briefly, was for extended programs from the federal government, even more than is currently being implemented.  Understandably, there is much concern today of socialism creeping into our governments so Minsky's solution will not likely be fully implemented.

With regard to these articles, especially the latter, I will avoid the temptation to cast judgment on any particular political view.  What I will opine, however, is that capitalism does not "fail" -- it simply follows a natural cycle that reflects human behavior that happens to go largely unchecked in a free society.

In a free society, individuals, businesses and institutions have an almost limitless capacity to fail, just as they have equal capacity to succeed.

The events in financial markets developing over the past few decades and unfolding within recent years simply speak to my consistent argument that human behavior, which is part of nature, has not fundamentally changed in thousands of years.  Only the environment has changed.

All of these observations underscore my belief that a great understanding of human behavior, combined with a significant degree of self-knowledge, allows for an understanding of all things touched by human behavior, including and especially financial markets.  In other words, knowledge of financial markets and financial instruments is less critical to understanding their cycles than the knowledge of human nature itself.

The only real certainty is that irrationality of participants in financial markets will return again, although it will manifest itself in a different form -- not a "repeat" but a rhyme of irrationality, if you will, that will continue to occur as long as humans populate the earth.

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Link to Don Ariely's book: Predictably Irrational: The Hidden Forces That Shape Our Decisions

Additional Reading on the subject of capitalism and human behavior: Atlas Shrugged by Ayn Rand.

Virtue: The Philosopher's Stone (A profound example of 'meaning before money')

"I tell you that virtue is not given by money, but that from virtue comes money..." ~ Socrates

A primary theme of this blog is that the greatest financial success does not originate in financial form -- this kind of success is but an incidental consequence of pursuing meaning in one's life.

A return to this theme of virtue preceding financial wealth comes today as a result of finishing a book last night with my two sons, ages 8 and 4.  This particular passage is the inspiration for this week's blog message:

As much money and life as one could want!  The two things most human beings would choose above all -- the trouble is, humans do have a knack of choosing precisely those things that are worst for them.

Before I reveal the name of the book and author, please allow me to establish a bit of general background:  This book is the first published by this particular author and the book's general theme is one of the classic good versus evil.  Of course, the good prevails, at least temporarily, at the end of the book because the evil fell victim to its own excessive greed for wealth and power.  Naturally, the very reason that the good prevailed is quite the opposite:  The virtues of contentment and altruism -- the tendencies to receive energy from helping others -- its radiant selflessness -- is how the good prevails in this book.

As you may have guessed, the book's genre is fiction/fantasy.  As you may not have guessed, the author wrote the book while surviving on welfare and went on to achieve something extremely rare in the literary world -- financial wealth beyond what most would imagine:

• The author's first book was followed by a series of related books, which turned into a wildly popular series of films.
• Overall book sales for the series to date are over 400 million copies.
• The author's cumulative wealth to date approaches $1 billion (that's billion with a 'B').
• The author is now known for being a great philanthropist, forming a foundation with an annual budget surpassing $5 million, plus generous giving to other charities.  On philanthropy, the author has been quoted as saying,  "I think you have a moral responsibility when you've been given far more than you need, to do wise things with it and give intelligently."
• The author never set out to be financially wealthy.  She wrote because she received great pleasure in the act of writing (Any person calling themselves "a writer" knows that money can not be a realistic motivator.  In fact, in the beginning of her career, the author's publisher wisely advised her to "keep your day job").

By now, you may have guessed that this author is J.K. Rowling, the author of the Harry Potter series of books, which inspired the films of the same name.  One thing I never knew until writing this post is that the first book was originally titled, Harry Potter and the Philosopher's Stone.  The title of the American release of the book (and subsequent film) removed the word Philosopher and replaced it with Sorcerer -- a change that Rowling fought but was not powerful enough at the time to prevent -- and hence became what is now Harry Potter And The Sorcerer's Stone.

The Philosopher's Stone seems a much more apt sub-title for the story:  The stone, of course, is the enabler of unlimited wealth and life.  In the book, the physical stone is destroyed, which (temporarily) removes the threat of evil.  The implicit message at the end of the book, spoken to Harry Potter by the good wizard Dumbledore, is that virtue is not given by the possession of material things -- it is found within; and by the giving to a cause greater than one self.

The destruction of the stone, therefore in my humble opinion, is a metaphor for virtue:  The virtuous are content with or without material wealth.  The non-virtuous are unhappy without it and will destroy themselves to acquire it -- and once they acquire it, if they ever do, they often discover that material wealth does not provide what they were originally seeking. 

Adding to this message of virtue is that J.K. Rowling acquired her unimaginable wealth as an unintended consequence of pursuing meaning, given at the lowest point of her financial wealth.

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Related:

Quotes on Contentment

(Why You Need To) Get Rich Quickly!

The Greatest Source of 'News You Can Use'

As a reader of this blog, you may have already gathered that I enjoy finding timeless observations of human behavior, especially by historical figures (some well-known, some not), that strike me as profoundly evident today.

The following passage, written more than 150 years ago, from Thoreau's Walden, struck me as a wonderful piece of inspiration and a potential aid in remaining conscious of one's personal information consumption and external influences, which tend to combine as a powerful source of distraction (and subtraction) from one's self-acquaintance:

We rarely meet a man who can tell us any news which he has not read in a newspaper, or been told by his neighbor; and, for the most part, the only difference between us and our fellow is that he has seen the newspaper, or been out to tea, and we have not.  In proportion as our inward life fails, we go more constantly and desperately to the post-office.  You may depend on it, that the poor fellow who walks away with the greatest number of letters, proud of his extensive correspondence, has not heard from himself this long while.

The Thoreau passage points to evidence of an inverse relationship between social media interaction and self-acquaintance:

• A high relative level of "news" consumption may make one more aware of current and external events but it has equal potential to make one less aware of current and internal events -- media noise, especially in the absence of self-awareness, drowns out the sound of one's own internal dialogue.
• More knowledge of financial information does not, by default, translate into more financial success.  For most, financial media increases financial anxiety, not financial prowess.  Knowledge is not wisdom.
• The addition of more "friends" on MySpace might translate into the subtraction of one friend you really need -- you.

What's really "new" about the news?  Try watching a newscast (especially local news) and try to find something different from the night before or even a decade prior.  Since "good news" does not sell, the news is filled with tragedy, crime, despair and petty political arguments -- all of which have occurred, in some shape or form, thousands of times over the course of thousands of years.  All that changes from day to day, month to month and year to year is the names and locations.

If we read of one man robbed , or murdered, or killed by accident, or one house burned, or one vessel wrecked, or one steamboat blown up, or one cow run over on the Western Railroad, or one mad dog killed, or one lot of grasshoppers in the winter -- we never need read of another.  One is enough.  If you are acquainted with the principle, what do you care for a myriad instances and applications?  To a philosopher all news, as it is called, is gossip, and they who edit and read it are old women over their tea. ~ Henry David Thoreau

Does one really need to see and read of the same happenings occurring again and again and again? 

To be fair, all news sources are not totally sensational and useless; however, the effort and time required to find something factual, unbiased and useful is generally too great and too much of a distraction and a drain on mental health to be worthwhile.

As with anything and everything, there is a balance to be found for optimal exposure to information -- the law of diminishing returns applies:  At a certain point -- the point of a healthy balance -- each increment of increased exposure decreases the given item's utility.  This balance differs for each person and self-knowledge is the means of discovering this balance.

The greatest source of "news you can use" is you.  Have you heard from yourself lately?

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Related Post: What Would Thoreau Think of Twitter?

Thoreau Image by Shannon

Recommended Books: On Mind, Meaning & Money

"The value of many men and books rests solely on their faculty for compelling all to speak out the most hidden and intimate things." ~ Friedrich Nietzsche

I recently had a request for recommended books, which I am happy to share!  Books are certainly the intelligent person's food for thought.  I would be happy to hear of any recommendations you might have (some of these books were recommended to me by readers of this blog).

Emotional Intelligence: Why It Can Matter More Than IQ:  I read this book more than 10 years ago and still refer to it quite often.  Author, Daniel Goleman, explains why emotional and social intelligence (EQ) is a greater predictor for success than intellectual and academic intelligence.  After reading this book, you will have a greater understanding of the human brain and why you think and act the way you do.  Self-knowledge is the most powerful knowledge and this book is among the best in this area.  It's also quite easy to read.

Man's Search for Meaning:  In this epic book, which has sold more than 10 million copies in at least 24 different languages, Viktor Frankl, a psychotherapist by trade, describes poignantly his experience in concentration camps during the Holocaust.  He observed that those prisoners who gave up on life, who had lost all hope for a future, were inevitably the first to die.  This classic book might represent the best $10 investment you've ever made.

The Paradox of Choice: Why More Is Less:  This aptly titled book, by Barry Schwartz, explains how too many choices actually reduces one's ability to prudently choose and how one may minimize the effect of choice overload.  Do we really need 85 different varieties and brands of crackers in the typical grocery store?

Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich: Put simply, humans are not hard-wired to be good money managers!  Jason Zweig does a fine job of pointing to neuroscience that supports this claim.  Personally, I believe that self-knowledge is the key to success in all areas of life -- not just personal finance.  This book is a great guide to understanding (and knowing) yourself as a human and how to prevent costly financial errors.

Walden: This classic piece of American literature is a masterfully written lesson on simplicity and contentment.  The book is based upon the author (Henry David Thoreau)'s life in a one-room cabin in the woods on Walden pond and his philosophical observations of life and nature during this three-year time period.  Every home library should have this book in it.

The Book of Questions: How much do you try to live now as you will one day wish you had lived?  If you had all the money you needed, what would you do?  Book author, Gregory Stock, PhD, asks hundreds of questions like these.  Answer them honestly to yourself and you will likely be a different person (for the better) after reading them.

Stumbling on Happiness:  Humans are terrible at predicting their happiness (or unhappiness); however, we continue to make plans based on these false forecasts produced by the imagination.  With a combination of science, philosophy and humor, author Daniel Gilbert delivers one of the best books I've ever read on the subject of happiness.  This is another "must have" for the pursuit of self-knowledge, which is arguably the true path to happiness.

The Philosophers Toolkit: A Compendium of Philosophical Concepts and Methods:  For any of you who like (or think you might like) philosophy but just haven't had a good introduction to philosophical concepts (such as fallacy) or methods (such as dialectic inquiry), this book is for you.

To keep this blog post digestible, I will stop here.  If more interest is shown in other book recommendations, I'll be happy to share them.  Also, don't forget to let me know which books you recommend...

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Nietzsche image by Shannon

On Investing, Gambling & Bounded Rationality

"A given man lives a life free from boredom by gambling a small sum every day.  Give him every morning the money he might win that day, but on condition that he does not gamble, and you will make him unhappy.  It might be argued that what he wants is the entertainment of gaming and not the winnings.  Make him play then for nothing; his interest will not be fired and he will become bored, so it is not entertainment he wants.  A half-hearted entertainment, he must delude himself into imagining that he would be happy to win what he would not want as a gift if it meant giving up gambling." ~ Blaise Pascal (1623-1662)

I had the privilege of writing a few guest posts this week on my favorite investing and economy blog, The Big Picture.

One post, "Are You an Investor or a Gambler?," makes an attempt at differentiating between investing and gambling.  Be sure to read (and join in) the comments that follow the post!  Readers often have the most interesting and insightful discussions.

The other post, "Do you consume information or does it consume you?," suggests that today's abundance and velocity of information does not increase the capacity to make rational decisions.  In fact, the information age decreases the capacity for rational thought (bounded rationality), as economist and psychologist, Herbert Simon (1916-2001), has explained:

...in an information-rich world, the wealth of information means a dearth of something else:  a scarcity of whatever it is that information consumes.  What information consumes is rather obvious:  it consumes the attention of its recipients.  Hence a wealth of information creates a poverty of attention and a need to allocate that attention efficiently among the overabundance of information sources that might consume it.

If you are new here at The Financial Philosopher or a "regular" visitor with interest in these topics, you may wish to explore the topic of Behavioral Finance further on these blog posts:

Beware of Confirmation Bias
We Are All 'Naive Scientists'
Finding God in Behavioral Finance
Know Thy Risk
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Pascal Image by Shannon

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

Stocks, Storms & September

"What is to give light must endure burning." ~ Viktor Frankl

As an investment adviser and a resident of coastal South Carolina, two thoughts come to mind every September:  Historically it is the cruelest month for stock investors and it is also the height of hurricane season -- both, to say the least, promise to create some level of anxiety for millions of people -- and this year is certain to be no exception to this annual reflection.

This time last year, the stock market and broader economy had just begun it's most horrific three-month decline (more than 40%) in a generation.  September 2009 also marks the 10-year anniversary of Hurricane Floyd, which is probably best remembered as the largest (and worst planned) evacuation of any kind since World War II.  For those of us in the Charleston, SC area, September 2009 also marks the anniversary of the most devastating hurricane that almost anyone in South Carolina can recall in their lifetime, Hurricane Hugo.

The big storms, whether they are financial or tropical have several commonalities:

• Storms (financial crises/hurricanes) are cyclical in nature.
• Even those with the greatest knowledge, tools and experience (stock traders/meteorologists) can not say with consistency or great certainty when and where the next storm will occur.
• Hindsight is 20/20.
  
• Decisions (investment allocation/evacuation) are best made before the storm arrives -- not during it.
• The worst behavior (complacency/denial) occurs immediately prior to the storm, especially if a long period of time has passed since the most recent big storm.
• The most prudent behavior (financial responsibility/preparedness) occurs following the big storms; however, this behavior shifts to complacency as time passes.
• There are rewards (higher potential gains for stocks/living on the beautiful coast) for taking risk.
• The most devastating storms (largest market downturns/most damaging hurricanes) tend to occur only once per generation (20 to 30 years).
• Investing in stocks and living on the coast have similar risk/reward attributes:  Stocks carry significant risk of short-term price declines but greater potential for higher long-term returns compared to "safer" investments.  Living on the coast presents significant risk of loss due to tropical storms but offers warmer climates and a wonderful quality of life.

"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over." ~ Aesop

One of the most positive results of these big storms is the emergence (or re-awakening) of great human spirit.  In the wake of the storm, most do not reflect upon what has been lost but choose, instead, to focus on what is still possessed -- all of which has nothing to do with money, material wealth or social status -- it is health, family, a tremendous sense of community and giving, that is colored with shades of hope -- all driving the survivors forward.

One does not ever wish for these big storms and certainly not the devastation they often bring, but they play an important function in nature -- one of cleansing and renewal.

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Related:

Quotes on the Unknown, the Uncertain & the Hidden

Quotes on Worry, Fear, Anxiety & Suffering

Frankl image by Shannon

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

Where is the pendulum now?

"Excess generally causes reaction, and produces a change in the opposite direction." ~ Plato

Do recent gains in the stock market reflect reality?  This is somewhat of an oversimplification but the stock market is a forward-looking, "discounting mechanism," which essentially means that today's prices reflect investors' expectations for corporate cash flows several months from now.

The price movement on the broader indexes, since the most recent lows on March 9, 2009, is up roughly 50%, which would suggest that the collective expectation of investors is that the worst is behind us and we are quite likely climbing our way out of recession now. 

What if this sharp rise in stocks proves to be a result of a premature and unjustifiable assessment of the current economic environment?  Have stock prices gone up too far, too fast?  Are we due for a "correction?"

Where is the pendulum now?

"The markets can remain irrational longer than you can remain solvent." ~ John Maynard Keynes

Irrationality exists at both ends of the sentiment spectrum: Stock prices can be pushed far too low by fear and uncertainty (as one may easily recollect from the recent past), just as stock prices can be pushed far too high by complacency and over-confidence.  The investor herd is "right" most of the time but eventually stock prices return to the mean or some reflection of "fair value."

Consider just a few observations that may suggest that stock prices have either pushed ahead of fair value or are "priced to perfection," setting the stage for a fall in stock prices if (and when) investors discover that their expectations may be too high:

• Consumers represent roughly two-thirds of the US economy and they are saving more and spending less.  In the short-term, this trend will not support the economy.
• Unemployment remains historically high and does not show signs of improvement in the short-term.
  
• Credit card companies are squeezing consumers by lowering credit limits and increasing interest rates, further constricting consumer spending.
• Federal stimulus is ending and it may be time for investor caution as recent strength in home and auto sales may prove to be fleeting:  The $8,000 tax credit for first-time buyers ends in November and the "cash for clunkers" programs ended this week.
• Stock mutual funds and Exchange Traded Funds (ETF's) had record inflows in July.  Record inflows (or record outflows) are often contrarian signals of unsustainable stock price movement.

"Bad reasoning as well as good reasoning is possible; and this fact is the foundation of the practical side of logic." ~ Charles Sanders Peirce

As with any logical observations, they are just that -- logical observations!  Any knowledgeable person could find supporting data for either side of the argument (stocks going up or stocks going down).  Knowledge, therefore, does not by default translate to good judgment.

Furthermore, media noise is concentrated on the short-term (using information from the immediate past) and leverages emotion to sell advertising.  This noise is not suited for the long-term investor, who is best served by tuning out the noise and investing according to their own objective and risk tolerance.

For now, investors may at least find comfort in observance of the pendulum's swing in the positive direction -- a stark contrast to this time last year.

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Plato image by Shannon

Related Posts:

Beware of Confirmation Bias

Recession is Official: Is it Time to Look Forward?

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

(Why You Need to) Get 'Rich' Quickly!

"Know contentment and you will suffer no disgrace; Know when to stop and you will meet with no danger.  You can then endure."
~ Lau Tzu

With all due respect to the phrase (and outstanding blog), "get rich slowly," this financial philosophy and life pursuit has great potential for failure and even self-destruction.

How so, you ask?

The word "rich," in this context, implies and supports the misleading conventional wisdom that success in life is measured by monetary means.  Additionally, the word slowly presents an incredible impediment to even making an attempt at such a seemingly long and arduous task. 

Patience is certainly, in the opinion of your humble author, among the highest and greatest of virtues.  Simultaneously, however, it may be as close to the antithesis of achievable human behavior as one can find.  Humans, as unhealthy as this behavior may be, want to find the shortest and/or quickest path from point A to point B.  Short and quick, for the human brain, almost always wins the battle with long and slow.

Why not, then, immediately stop the struggle against human nature, remove anxiety and accomplish the goal of getting rich in the quickest fashion possible?   How can this be done?  How can this be prudent?  The answer, much like the solution to many "problems" we humans face, is quite simple:  It is a shift in perception and an alignment with personal values via the definition of terms.

"He who knows contentment is rich." ~ Lau Tzu

In essence, the phrase "get rich slowly" leads one to believe that their patience in pursuit of monetary wealth is a virtuous path.  But does this path lead to a virtuous end?  And does this end justify the means?  If, for example, one sacrifices the present for some unforeseeable future, then this delayed gratification, by default, is virtuous?  Does the pursuit of monetary goals distract from meaningful pursuits?  What is your definition of rich?  Is it possible that you are already rich?

If one defines the word rich in non-monetary terms, the seemingly herculean feat of "getting rich" may be one of the easiest (and most valuable) accomplishments of one's life.  What if "rich" is simply defined as "being content?"  Imagine how some of these definitions might make you "rich" now:

• Being in good physical, mental and spiritual health.
• If you are a parent, your children are healthy.
• Being loved and having someone to love.
• Making a difference in the life of another.
• Your life has meaning and purpose.
  

"Health is the greatest possession.  Contentment is the greatest treasure.  Confidence is the greatest friend.  Non-being is the greatest joy." ~ Lau Tzu

It is quite true that without sufficient financial health to provide the basics of life -- food, shelter and clothing -- one's non-monetary measures of health (physical, emotional & spiritual) can be eroded.  If you have enough, however, to provide these basics of livelihood, then the pursuit of financial wealth need only be a support for pursuits that truly bring meaning and purpose to your life.

There is a case for balance:  Absolute financial poverty erodes at all levels of health.  The consistent raising of the desire for greater financial wealth, beyond enough, however, may also erode at your non-financial well-being.  Contentment represents this balance and therefore is the healthiest and most virtuous definition of rich.

Sure, you can continue in your path toward financial freedom (that's another term to define) via debt reduction, spending less than you make, investing your money wisely and all of those conventional money management techniques.  But just think how much you can gain by detaching yourself from the need to define your wealth in monetary terms -- by simply learning the art of contentment?  If you are already rich in this sense, your financial pursuits become much more achievable and will provoke much less anxiety. 

Now pursue contentment:  Simply say to yourself, "I am rich;" find a non-monetary reason for this wealth and repeat this often... and you are on your way to "getting rich quickly!"

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Lau Tzu Illustration by Shannon

Related Posts & Pages:

The Diminishing Marginal Utility of Wealth

The Five-Minute Retirement Plan

The Secret to Happiness is... No Secret

Life Planning Part I: Are You a Tool?

Quotes on Contentment

Beware of 'Confirmation Bias'

"In the case of any person whose judgment is really deserving of confidence, how has it become so? ....  Because he has felt, that the only way in which a human being can make some approach to knowing the whole of a subject, is by hearing what can be said about it by persons of every variety of opinion, and studying all the modes in which it can be looked at by every character of mind.  No wise man ever acquired wisdom in any mode but this...." ~ John Stuart Mill

Do you seek out information that agrees with your perspective?  Of course you do!  And investors are certainly no exception to this behavior.  Not only do you prefer to seek views that align with yours but you tend to ignore those that do not.  Is this healthy behavior?  Perhaps it is and perhaps it is not; however, your humble author will suggest that an awareness of this human tendency is healthy and the unawareness of it is not...

"Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof." ~ John Kenneth Galbraith

Confirmation bias is the technical name for people's desire to find information that agrees with their existing view.  Information that reinforces favored preconceptions is over-weighted (also known as self-attribution bias) and any information that conflicts with this view is ignored. Taken from an investing perspective, possibly you have said something like this: "Nah, it's a short-term blip -- the market will soon return to its most recent pattern." 

"There is no conversation more boring than the one where everybody agrees." ~ Michel de Montaigne

Now that you may be at least a bit more aware of your tendency to over-weight information you find agreeable and to under-weight information that you do not, how may confirmation bias be overcome? 

• You can begin by attempting to give equal time to information sources with which you agree as to those with which you disagree.  No mind has ever grown without stretching beyond its comfort zone.  Is it not the blunt stone that sharpens the blade?
• Also beware of the mainstream media because it tends to attach itself to the bias of the herd.  Have you noticed a recent shift in the media's overall sentiment from bearish to bullish?  The popular view seems to be shifting toward stating The Recession is Over.  This is the same media that said, less than one year ago, that the US Economy was headed for The Next Great Depression.
• When you find yourself overwhelmed with reasons to make a decision to do something, force yourself to come up with reasons why you should not do it (or remember the third alternative -- deferring the decision to a later time).
• Simply be aware of what information you consume.  If information were food, would your "diet" be healthy?  Is it balanced?
• Don't be mentally lazy.  Complacency is a breeding ground for other potentially damaging behaviors, such as greed and hubris.

"The difference between what the most and the least learned people know is inexpressibly trivial in relation to that which is unknown." ~ Albert Einstein

Any person with a few minutes of time and minimal education level can find data points to support any given view, especially about something that is, at present time, unknown.  No matter how convincing an argument (or how strong your attraction to like-minded perspectives) be sure that your decisions are actually yours.

"There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." ~ Jesse Livermore (hat tip to The Kirk Report)

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Source: Behavioural Finance: Insights into Irrational Minds and Markets