What I've Been Reading

With the baby boomer retirements looming, so that far fewer workers will soon work to support far more dependents, we as a society need to do everything we can to store more wealth. To prepare for this, we need to store wealth in one or more of the four ways above: stockpiles, tangible physical infrastructure, intangible improvements, and human capital. 

Bypass Wall Street: A Biologist's Guide to the Rat Race by Joanna Masel. Human relationships are messy.. but yet Masel insists its better than blindly trusting Wall Street to invest for the future. I grew up in India and watching the messy human relationships getting more messier when rupees came into play. So I am in the neither/nor team.

Sometimes we have a choice in how we estimate things. We can either be precise, or we can be accurate, but we cannot always be both. This trade-off is well know to engineers who work in measurement systems.

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To understand how the difference between precision and accuracy affects investing, consider the stock of some company. Its long-term value to Jen's retirement portfolio depends on the future profits of the company compared to the returns that one could get buying a different financial asset instead. We can't know this true value. Only with hindsight, many years later, could an analyst look back and say that a good price would have been $105.67. This is its real, but unknowable value. Stuck in the present with no time machine, the best analyst can do is estimate that the stock is worth about $100, plus or minus $10 or so. He can't be more precise than that, but he is in fact quite accurate, only about 5% off. On the market, the stock is trading for $122.39. This is very precise, down to the cent, but less accurate: it is 22% off. Our analyst estimate is more accurate, while the market is more precise.

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Their precision is a lure that Jen (we) should ignore. To invest more successfully in the future, we need accuracy instead.

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A short-term trader quickly learns whether he is doing a good job being precise. He either succeeds in making money, year after year, buy buying low and selling high, or he doesn't. His incentive is to succeed in his short term task. He get plenty of feedback as to whether he is doing a good job. This frequency of feedback is a major reason why humans make the mistake of favoring precision over accuracy. But to successfully invest in our long-term interest as a society, we need to become more accurate. In the fight for accuracy, precision is a false god and our enemy. In her search for good investments, Jen therefore resolves to ignore the allure of precision.