Never lose money (or anything else)

As I mentioned some days ago, I have just gone through a biography of Warren Buffet. One of his principles, it seems, has been to force company managers to always return sizable value to the shareholders, even when this means to reduce investments in growth. 

In a way, this reminds me of the agile obsession in software development to continuously return value to the stakeholder: small, stable, robust increments, delivering additional value to the company and the stakeholder. Abhor big-bang releases, make sure to get from a stable situation in another stable one and always make sure to give your shareholders some value, if only in the form of added knowledge.

I even suspect that the terminology used in the agile community is, at the very least, inspired from value-based investment theory. You often read about stakeholders, return on invest and similar vocabulary.

I have to admit that this point of view has a great appeal to me. I personally see applications of this principle in other situations. Some years ago, I was reading a book about relationships and communication in married couples (no, I cannot remind the title this time) and one of the behavioral psychologists authoring the book observed that much suffering in modern world arise from the underestimation of the effect of the pain arising from a divorce or otherwise separation and from the failure to objectively manage the unpleasant situation of a difficult relationship. The unexciting course of action would be to give to (and request from) the partner a small, but constant return on emotional invest. In the book, they even used the word "relationship account" and devised a structured approach to make (and request) small, continuous payments to this account. I have to admit that this structured approach has navigated my wife and myself out of dangerous waters in bad periods.

In contrast, a large investment with an uncertain return (separation and hope in a better future relationship, to stay in the current example) is often preferred to the small return of a current difficult relationship, and one fails to focus on effective measures to increase this small, but steady advantage.

As I was discussing exactly this topic with my wife some days ago (she always has to endure my rants about whatever book I read last), I just realized that this effect is wonderfully explained in in the masterpiece Thinking, fast and slow in terms of cognitive illusions. In fact, what happens here is the overconfidence in the own imagination of future situations due to the cognitive ease with which we ignore the difficulties which will arise in the future, just because we don't see them now. And, of course, we overestimate the effect of our actions since we can easily imagine them. 

A future great reward with little chance of realizing is preferred to less exciting options, in particular when the current situation is slightly adverse. So, never lose money or anything else!

Reading about debt

I often talk to friends and family about books, often in a overenthusiastic manner. I like books and I like, more than everything else, to find useful stuff for real life in books.

If you're now expecting an apology of "Mindfulness for dummies" and the like, I have to upset you; I found out that the treasures are to be found in unexpected places.

As an example, take my last two reads: Debt, the first 5000 years and Buffett, the making of an American capitalist (not finished yet, but I also learned something very useful there, which does not have anything to do with investment, but let me talk about it some other time).

Does it sounds weird to have a leftist anti-capitalist book about debt in the direct neighborhood of the very generous biography of man with US$ 87 billions net worth? Don't worry about my mental stability, I do it by purpose. 

(Which of course is not a sign of mental stability, now that I think about it)

The first book investigates the origin of money in the credit instruments of ancient civilizations. Yes, it looks like it is an established fact that the Babylonian had financial instruments recorded on clay tables in a fictive currency (the bushel) which was only used for recording these financial transactions. And yes, they knew about compound interest. And no, they did not have any money you could exchange on the street. Crazy.

Anyway, there are also pages dedicated to the fact that the precise quantification of debts between neighbors and acquaintances tends automatically to depersonalize these relationships. This being the reason, for instance, for which we do not like to precisely keep track of who owes whom how much money if we go out with our best friend for a beer.

My wife is thinking since some time about turning her year long practice in mindfulness mediation and her teacher experience with it in a full-time activity mixing self-employment and community service. We talked a lot about financial independence and the like in the last weeks. And then BANG! I read this book and I understand why the financial dependence feels so threatening in a relationship. Suddenly, I have a framework on how to talk and think about it.

I think this is the sign of great books: you find insights and inspirations there which do not have anything to do with the apparent topic in the book.

Good reading!