Let me start off with a story a local farmer told me. I think you kids will like this one.
Jan has always been an enterprising farmer, anxious to do whatever he could to improve the yield on his land. Each winter he would read up on some of the latest farming trends, eventually investing his time and capital into the more promising ideas. He even went as far as planting an obscure crop one year after a big crop failure in Asia sent prices much higher.
(Don’t ask me what crop it was. I just racked my brain for five minutes and can’t remember)
One year, in the late 1990s, he stumbled upon his best idea yet. The premium paid for organic products was massive when compared to the regular stuff. We’re talking anywhere from 25-75% more for the same ol’ wheat. He investigated the steps it would take to become a certified organic grower. They weren’t easy. He was forced to leave land fallow for two growing seasons and do various things to remove any lingering pesticides. He could no longer use conventional fertilizer. Special machinery was needed. And so on.
The list was long, but he did it. It was all worth it during year three when his bumper crop was worth more than ever. Jan also figures his land is worth 20-30% more than conventional land, since he’s regularly getting that much more for his crops.
One day, while standing on his fancy organic field, Jan realized something. His neighbor was spraying pesticides on his crop. It wasn’t a particularly windy day, yet it sure did look like some of the liquid was ending up on his land. After waiting a while for the neighbor to finish up, he went over and inspected the edge of his property more closely.
Sure enough, it was damp. Some of the pesticide had made its way onto Jan’s organic field. He quickly realized this was likely happening every year. After all, the only thing separating the two was about 15 feet worth of road.
Jan did the right thing and reported the findings to the organic council or whoever it is that certifies land as organic. They promptly took his classification away and refused to give it back.
Just kidding. He did no such thing. He shut his mouth and went back to farming. He swears yields from that part of his land are consistently higher than the rest.
How this relates to your personal finances
I realize this is only loosely related, but screw it. What am I supposed to do, not tell that organic farming story?
Let’s talk a little today about biases, and how they might be making you poorer. But first, another story!
I like to refer to one of my buddies as a walking bias factory. He constantly comes up with poor ways to justify things. The things he cares about are uber important, and he has strongly-held opinions about them without much independent thought behind them. When faced with evidence that one of his pet opinions might be wrong, he flatly ignores it. You can see the pain in his face if you push just a little bit.
Naturally, this delights me, and I take the opportunity to troll him whenever possible. Just a bit, though. I’m not an animal.
I suspect many of you are doing the same thing when it comes to your finances. How many times have you heard the following?
- Never pick individual stocks. Only ETFs will make you rich
- Buy the most expensive item. It ultimately ends up being the frugal choice
- All mutual funds are trash
- Only a maroon goes without life/disability/travel insurance
- Retire at 65? Why? 40 is the ideal retirement age.
And so on. There are a million of these things.
We blindly accept a lot of these as facts because they’re easy to believe in. Just look at the S&P 500 performance over the last decade. And all of the people who are screwed because they didn’t get disability insurance. Retiring at the conventional age may have worked for Baby Boomers, but there’s no way in hell we can expect a millennial to wait that long.
But how many of these are really true? If all mutual funds were trash, would this fund exist:
(I cut off the bottom axis. That growth was since inception in 2009. Annual returns have been 17.2% annually.)
That’s the Pender Small-Cap Opportunities Fund, which invests in small-cap Canadian companies. It has absolutely demolished the TSX Composite since inception. You can’t invest in it, though. They recently closed it to new investors despite only having less than $200 million in total assets.
I can bust a lot of the other myths I put up earlier, but I won’t bother. Just check my archives; they’re full of posts saying why the average rule of thumb is bullshit — at least some of the time.
Get to the point, Nelly
I am. Geez, guys. Whoever writes the subheadings here is kind of a jerk.
We blindly believe the organic bread at the store is made with 100% organic wheat. My friend the farmer would urge y’all to not be so naive.
We blindly believe all mutual funds are trash, ignoring the funds that absolutely kill it over a long-term basis. These funds don’t confirm our already-held beliefs, so we ignore them.
The overall point is this. You likely haven’t done the research on many of the things that strongly influence your life. You just heard something was true and you chose to believe it because that fact sounded reasonable at the time.
I constantly seek out opinions that differ from mine. You should see some of the people I follow on Twitter. I get mad every time they pollute my feed with opinions that are clearly 14 different kinds of wrong. I mean hell, I follow people who invest in gold and crypto currency. I follow feminists who somehow believe 2018 isn’t a terrific time to be a woman. I follow early retirees and debt bloggers and so many more people I really don’t see eye-to-eye with. I’d say a full 25% of my feed is this way.
Why do I put myself through this? Because without these differing opinions constantly challenging me, I’m no better than my walking bias factory buddy, just repeating the same maxims I heard some smart guy say five years ago and talking my own book.
Think critically and don’t believe everything you read. Loosely hold new opinions and constantly challenge existing ones. Change your mind on things that are important. These are the things that will take you to the next level.