“Eating at home is free.” So began the dinner conversation with my ten year old daughter and nine year old son. “Hmmm…”, I grunted through a mouthful of food. Obviously I had some explaining to do. As the conversation developed I realised that you shouldn’t invest in anything that you can’t explain to a ten year old. Even then, there’s still plenty to avoid.
“What makes you think that eating at home is free?” I replied, once I had finished my mastications.
“Well, we (sic) pay for school meals and to eat in restaurants, but we don’t pay at home” chirped my son.
“Yes but we have to buy food. How much do you think I spent the last time I went to the grocery store?”
They both hazarded guesses. After several upwards guidances we eventually arrived at the number. They gasped. The conversation moved on to money.
“Dad, do you keep your money in a bank?”
“Well yes, mostly. Everyone does.”
“It’s better to pay with cards, isn’t it, instead of cash” suggested my daughter.
“Well no, it works out the same.” I then explained the process.
“What happens if someone steals your money from the bank?” continued my son.
Talking about how people rob banks got the kids very excited. According to my daughter the robbers get in from underground. I started to wonder what she’d been learning at school…
After dinner I was helping her out with some homework. She wanted to sit down with me and read something about the Industrial Revolution. We settled into our seats and she started reading aloud.
“The Industrial Revolution began in Britain in the late 18th century….er, Dad, what’s the 18th century?” We were still on the first line and I was already on the spot.
“It’s any year that starts with 17. For example, 1780.” Further explanation of the Gregorian calendar followed. We continued reading, with regular interjections and questions.
“What’s the economy?”
“Well, let’s see…” I stalled her as I gathered my thoughts. “Different people make or have different things. They exchange them with each other, usually for money. That’s the economy.”
“I don’t understand.”
“Hmm. Okay, imagine I have bread and you have water. I want some water to drink with my bread. You want some bread to eat. So I give you some bread and you give me some water in exchange. That’s a simple economy. Now let’s say your brother has some toys and needs bread and water. I give him some water because I want a toy. He then gives you some of that water and you give him some bread. Now think of all the things we use, and of all the people in the world constantly swapping them between each other. That’s the economy.”
I await my Nobel prize….
She seemed satisfied, so we moved on. I didn’t have to wait long for the next question.
“What’s the textile industry?”
“It makes cloth and clothing. For example your pyjamas and the cover on this chair come from the textile industry.”
“That’s when people change the way things are done. Usually it’s an improvement, but not always.”
“Oh, you mean like when cars replaced horses.”
“What’s a steam engine?”
“Well you know what happens when you make water really hot, right? It turns into steam. So in a steam engine you light a fire, heat up some water until it turns into steam, and that steam pushes things and makes them move. They used to use steam engines to make machines work in factories, or to drive trains.”
If you can’t explain something to a 10 year old then you probably haven’t grasped it yourself.
The questions went on. I did my best with the answers. But it made me realise something. If you can’t explain something to a 10 year old then you probably haven’t grasped it yourself.
Put another way, if you can’t explain it to yourself in simple terms, then you haven’t really got to the bottom of it. It’s about boiling it down to the essential basics.
This is not to say that thinking…analysing…investigating…pontificating is an easy process. Far from it. It’s only possible to reach clear and coherent conclusions by going deep into the detail.
But once you come out the other side, and wipe the sweat from your brow, what remains should be concise and simple to understand. You’ve worked out what to discard. You’ve cut through the noise, and found inner peace. That’s how you should approach your investments.
My field happens to be finance and investing. Over more than two decades I’ve been immersed in all its theories, hypotheses, jargon, complex formulas, history, and analysis. Not to mention putting it all into practice.
This learning process has involved reading dry academic papers on the monetary system…wading through long books about investment strategies…talking at length with “rocket scientists” about theories concerning risk…or just chewing the fat over a beer with a contact in the investment industry.
The main benefit of the deep dive was to work out what to discard or ignore. In the end it’s simplicity that counts.
Ultimately, I’ve realised that most of that time spent was actually a process of elimination. The main benefit of the deep dive was to work out what to discard or ignore. In the end it’s simplicity that counts.
Fancy new investment products, usually with big promises attached, come along all the time. Often they’re just the same old diseased pigs as before, trotted out with a bit of lipstick smeared on their snouts.
By knowing the detail of the financial industry’s tricks and complex language it’s much easier to see through them. Then there’s no need to chew on the rotten flesh that gets served up from the recycling bin.
Perhaps my kids will ask me some of these questions in future:
What’s a government? A lot of people who think they know better than anyone else.
What are taxes? Money you have to pay to the government. Some of it gets used for things you like. Some of it is spent on things you don’t like. Much of it is simply wasted.
What are government bonds? A way to give even more money to the government for it to waste.
What’s the stock market? A place where patient people can make lots of money. A place where impatient people usually lose lots of money.
What’s a hedge fund? Something that makes its managers rich.
Where does money come from? Banks create it out of thin air when they make a loan.
What’s quantitative easing? That’s when central banks create money out of thin air. Most of it goes to the government and is wasted, because it’s used to buy government bonds. It also makes stocks too expensive. It also makes hedge fund managers even richer.
What’s a “worst of call spread”? Four words that should make you run out of the room. (Note: it’s a complex financial derivative strategy that’s impossible to price sensibly.)
Back in the present day, my daughter finished reading about the industrial revolution.
“As farm jobs were replaced by machines the rural population was forced to move to the cities in search of work in factories. They worked very long hours and lived in filthy slums.”
“Well, you have to start somewhere. I reckon this book was written by a socialist.”
“Yes Dad. What’s a socialist?”
“Ok, enough questions. Time for bed.”
Stay tuned OfWealthers,