Net Worth is a Worthwhile Obsession

May 19, 2010

Ron Lieber wrote an interesting article in the New York Times about a number of websites that allow you to anonymously track and post your net worth and compare it with others in similar circumstances.  Mr. Lieber didn’t say explicitly what he thought about this new trend in social networking, but the title to the article, “Net Worth Obsession,” gives a clue.  A number of pundits were quoted decrying the trend:

But does our almost irresistible urge to rank ourselves against others based on any available data serve as a source of inspiration? Or does it lead to endless striving in search of some ever-elusive achievement? “I think this is a profound problem, this aspect of humans in the West,” said Andrew Oswald, a professor of behavioral science at the Warwick Business School in England. “We’re now extraordinarily rich by almost any standard of human history. But because we are creatures of comparison, it’s harder to get happier and happier.”

It’s certainly possible to pay too much attention to your net worth and ignore your happiness, but most of the actual site participants had very positive things to say.  Perhaps there is something redeeming in tracking assets minus debts!  One user says:

Initially, the idea of laying herself bare on a blog and on NetworthIQ caused a lot of anxiety. “You’re saying I have a secret and here it is for everyone to see,” she says. “But once it’s out there, and especially now that it’s not just a flat line saying ‘negative $23,000,’ and it is moving up a little bit, there’s a sense of pride and accomplishment that goes along with that. I know people are visiting, and it makes me want to pay something else off so I can post another entry that’s something good.” She’s currently putting a third of her monthly take-home pay from her job as a benefits analyst toward debt payments.

All of this has led to some odd reversals in her life. She looks forward to getting her bills in the mail, for instance, because it means it’s time to update her total debt. “Which might be a little bit sick,” she said. “But I know it’s lower than the last month. I know it for a fact.”

Grant often wonders about the people who are far ahead of her in the NetworthIQ standings. Did they get lucky? Are they lottery winners? Or did they get smart about money before she did? She tries not to beat herself up over it. “For people with the same income as me but higher net worth, it tells me that I can get there, too. It just takes discipline,” she says. “I know it has only been a couple of months now, but I kind of feel like I’ve made a life change.”

In other words, most of the participants found tracking their net worth to be motivational.  This is something that I have noticed repeatedly with real clients over the past 25 years.  The clients who track their net worth always do way, way better than clients who have only a vague idea of their finances.  The difference is so dramatic that I routinely suggest the practice to clients.  Before there were social networking websites for net worth, there were spreadsheets.  As far as I know, none of my clients have ever shared their information with anyone but their financial advisor, but like most things, just the fact that it is being tracked makes them pay attention to it.  Most clients do not see updating their spreadsheet each month or each quarter as a joyless activity–they are instead motivated to keep that number moving north.

If competing with your net worth on a social networking website helps push you to save and invest, well, more power to you.  One person interviewed in the New York Times article makes this same point:

She admits that some of her pleasure is fueled as much by competition as self-satisfaction. “I’m not that far off from the person right above me” on the NetworthIQ list, she says. “I can probably catch them this month. And maybe next month I can get to the next one.”

It’s not as if people don’t notice their socioeconomic status anyway.  Even Mr. Osvald, who was quoted earlier in the article lamenting the “profound problem” with humans admits that comparison is actually just human nature:

Oswald, the professor of behavioral science, says the craving for comparison may be rooted in our biology. “It’s easier said than done to break through two million years of evolution,” he says. “A million years ago, you could watch what others were doing and mimic that to get food and resources. Or if you were high up the monkey pack, you could get the best mates.”

Let’s face it: everyone wants to be high up in the monkey pack.  Perhaps we’re not all members of the same monkey pack, but humans always and everywhere are in competition for resources.  Consequently, social and economic signifiers are embedded in everything from the car you drive, the sneakers you wear, the sports you enjoy (polo anyone?), the bling and tats you do (or do not) have.  We have elaborate social ways of interpreting these signifiers:  the same Bentley might be seen as appropriate if the owner comes from “old money,” but tacky if the owner is “nouveaux riche.”  Most product marketing is based more on the branding–the social signifier–than on the actual product features.

“Keeping up with the Joneses” will always be with us.  Ultimately, I think tracking net worth is a much healthier way of keeping up with the Joneses than accumulating possessions and racking up consumer debt.  After all, most of our personal and national fiscal problems are caused from too much spending and not enough savings and investment.  Tracking your net worth, I suspect, is actually aspirational and motivational rather than pathological.  Instead of sucking the fun out of life, clients end up bonding with their grandkids for the summer at the beach condo they wouldn’t otherwise have had.  Pundits may worry about it, but the public seems to find it practical and valuable.

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How To Get Back on the Bike

May 19, 2010

Most of us learn to ride a bicycle when we are young.  The process, despite the well-meaning frantic coaching of our parents running alongside us, is basically trial and error–including lots of crashes.  As children, we have a “beginner’s mind.”  We are willing to listen to anyone who has a plausible theory about riding a bike because, after all, we know nothing about it.  When we fall down, we are told to immediately get back up and to get back on the bike.  And we do, since most all of us can ride a bike.  But what happens when an experienced rider–who expects to be successful–has a crash? 

Today I read an article in the New York Times about horrific cycling crashes, and how professional cyclists get over their fear and get back on the road.  I noticed a number of parallels between the article and how the capital markets operate. 

Click here to read the NYT article, Crashes Can Make Even the Best Cyclists Uneasy.”

The article focuses mostly on Jens Voigt, who is one of the older and more experienced riders on the professional circuit.  In the Tour de France of 2009, Voigt crashed so badly that he couldn’t finish the race.  Plenty of people worried he would never race again.

He had a concussion, a litany of bruises and several broken bones in his face.  His orbital bone was broken in two places, his jaw in one.  The wall of one of his sinuses had been punctured and was filling with blood, causing equilibrium problems, Voigt said.  That injury later required the insertion of a titanium plate to hasten healing. 

Sound familiar?  If you were invested in the stock market during 2008, the description of Voigt’s wounds should ring a bell…that’s probably how you felt by the end of the year.  Broken down, beaten up, your face literally smashed in.

A lot of people quit the market after the 2008 meltdown (see this post about money on the sidelines), just like some cyclists never recover from these types of epic crashes.  It’s just human nature – some people just can’t get over that fear of defeat, especially after tasting asphalt.

Jens Voigt on the ground after his crash. Source: NYDailyNews

What separates those who can get back on the bike, and those who just walk away?  The answer is probably different for every person, but I’m going to tie it directly to one of the skills required for success in the capital markets— DISCIPLINE.  The type of person who can get up after a bicycle crash is the same type of person who can recover from a setback in the market.  The determination and willpower necessary to recover and excel professionally after this type of crash is not superhuman–we all do it when we are first learning to ride a bike.  This type of behavior is not to be confused with blind faith or sheer stupidity.  Each time you get back on the bike you try to do things a little better than last time, but you have a strong underlying belief that you can learn to ride successfully because you see others who have learned how to ride. 

Now consider a time-tested investment strategy like relative strength that has outperformed for decades – do you just walk away from your strategy after hitting the pavement?  Or do you shake yourself off, collect your senses, and get back on the road?  The drive to succeed is a matter of temperament and must come from within.  A systematic process can only do so much to help you with this decision…anyone can just quit and go home.

If we’re working on being smart while operating within the capital markets, discipline alone will not carry you to finish line.  It’s the whole package – knowledge, discipline, and patience – that are going to guide you successfully.  Crashes are always just around the corner.  Crashes happen.  It’s your job as an advisor to be ready to deal with them.

Final Thought: One of the more interesting bits in the article highlights how Voigt went back over the tapes again and again to try to figure out “what he did wrong.”  In the end, his tire slipped on road paint and he was face-first on the ground within half a second.  There was literally nothing he could have done to prevent the crash.  That’s often the case in markets as well.  You can’t always prevent it, so you’ve got to be prepared to deal with it and get back on the bike.

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High RS Diffusion Index

May 19, 2010

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/18/10.

(Click to Enlarge)

The 10-day moving average of this indicator is 49% and the one-day reading is 33%.  Dips in this oscillator have often provided good opportunities to add to relative strength strategies.

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