The Wisdom of Finance
Discovering Humanity in the World of Risk and Return
By Mihir A. Desai
Review was written by Steve
After reading Dr. Desai’s excellent book twice, I could still benefit from a book club discussion to comprehend the enormous challenges that “The Wisdom of Finance” takes on. Thus, I present an amateur review of a complex problem from a do-it-yourselfer (DIY) regular investor. But the implications of combining humanity and finances have never been greater. The world is changing, the financial industry and the humanities had better get prepared for this inevitable evolution.
The most asked question in recorded human history is: “What is the meaning of life?” Dr. Desai attempts to connect the meaning of life and the meaning of finances. His attempt is a tall order; other authors ventured into this murky and unexplored area of life and money. Think about this challenge: the author is connecting the dots between two opposing schools of thought: 1. the sophisticated, intimidating, and the respected “quantitative” discussion with the, 2. lesser status and less respected “qualitative” analysis (stories and memoirs). Neither school embraces the other.
Dr. Desai humanized the old-fashion cold and heartless world of finance by relating it to holier-than-thou experts on literature, history, philosophy, music, movies, and religion. The goal of the author is to place finance where it should belong, as a life-affirming idea, so that this combination might lead to making the world a better place for everyone.
The author discussed community and personal relationships all through his book. Currently, the online discussion forums are about communities of tens of thousands of the public coming together and helping financial newbies with spending, debts, diversification, investment theories, becoming a DIYer, monitoring your financial adviser, etc. all for FREE! These groups are only going to get bigger and more influential. Since the internet and online connections started in 1995, thousands of regular investors are happily and successfully managing their portfolios with online monitoring tools. More recently, Robo “advisers” are going to get more precise and more customizing for individuals. If Tesla Motors develops auto driving, then someday, Robo technology will successfully monitor our portfolios because the technology takes the unpredictable human emotions out of the equation, and the calculations are error free. That’s awesome.
Savvy individual investors and some in the financial planning profession complain that our family and friends (and the general public) are not interested in personal finance. The reasons are complicated and costly. The author’s introduction and his final chapter, “Why Everybody Hates Finance?” explains why people are wary and distrustful of the financial industry. But people need to embrace the financial industry because “ignorance of it has never been more costly.”
The problem with 99% of online discussions is that the quantitive aficionados dominate the discussions. The unfortunate results are intimidating at best, and a complete turn-off at worse. Some newbies could not define a common stock let alone debating with confidence about the yield curve. Don’t get me wrong, I have learned much, and I am personally respectful of the quantitative analyses side and will never need a financial adviser to manage my 7-figure portfolio. I learned all I know from books and these investment forums.
The author is surprised with each new class of his highly elite and probably some of the most gifted and talented college students on the planet are also intimidated by personal finance! I believe this is the primary reason the author wrote this book. The author is hoping that the humanities can be used as an additional tool to help everybody perceive that everyday life might be more helpful than we now think.
Like the author, I am shocked that many of my friends who are smarter and more talented than me are simply not interested or just don’t get this investing thing! I consider myself incredibly lucky that I could embrace the financial value system head-on and make it my own. But that’s my qualitative story which is not welcomed either by the financial profession or understood by my friends, and that’s what the Wisdom of Finance is trying to do.
When the author thinks that the quants’ (the financial professionals) primary purpose is to intimidate people with formulas and spreadsheets, I had to read this book. Most people’s only experience with finance may be watching and listening to CNBC’s endless and familiar panel of financial “experts,” or hearing their favorite uncle’s investing tip of the day. Much of the financial advice industry, especially the insurance industry, exploits the public’s natural stock market fear. I think we can all agree (both the public and many in the financial advice profession) that to keep the public as naïve and dependent for as long as possible is a perverse incentive to stay in business. 99% of the topics discussed on the mainstream financial networks are 99% garbage for long-term wealth building. Consequently, the financial industry can charge outrageous adviser and investment fees under the “suitability” standard, estimated by the Department of Labor in 2015 to be $17 billion!
Seventeen billion dollars is a direct reflection of the magnitude the problem with personal finance. The stakes are too high. Far too many of the public will remain lost in a world of spreadsheets on the one hand while trying to understand Shakespeare’s “Merchant of Venice” on the other.
The following are my favorite chapters:
Chapter 1: “Wheel of Fortune” Understanding that life events are random, and that uncertainty will never go away. To deny uncertainty in relationships, jobs, weather/climate, natural disasters, our health, family and friends is denying reality at a high cost in an otherwise preventable emotional suffering and financial loss. It’s not what happens “out there” it’s how we plan and respond to what life throws at us. Shit happens to the best of us.
How misunderstanding the hard science of probability supports the delusional benefits of gambling, which are NONE, and the appropriate role of insurance to protect us from some but not all of life’s uncertainty.
Chapter 2: “Risky Business” Understanding risk, and our unique risk tolerance, is the ultimate task for all investors. The author supports Modern Portfolio Theory. The diversified portfolio is still the best and only “free lunch.”
Chapter 3: “On Value” IMO, this is the author’s best chapter. While I think his “Parable of the Talents” is interesting, it’s a weak augment about predicting value. Some of this chapter should have been in the Risky Business segment. He supports passive investment strategies of luck over skill (big time!) and managing beta rather than depending on alpha: “The lesson of finance is one of humility…. The hardest aspects of the … –worldview of many practitioners of finance—can usefully be tempered with humility, generosity toward others, and a keen appreciation for the force of luck in life” (p. 74).
The “force of luck” in our lives is HUGE! I am lucky that I was born in the U.S. with parents who did not abuse me. I could have been born in Bangladesh or with drug-abusing and violent parents. As a cancer survivor, I am lucky to be alive. I am lucky to have the where with all and the motivation to manage my investments without an adviser. I am lucky I can live and learn from my financial mistakes, and taking responsibility for those mistakes instead of blaming Wall Street or the “system.” Yeah, I worked learning to manage my investments, but I was lucky that I had enough common sense to carry out that goal. Here are two interests I had in which I also worked long and hard too, but failed: 1. I wanted to be a therapist in private practice, got the training and the license, and but it never worked out for me, 2. On my solo flight in my private pilot’s training, I crashed landed my plane. Luckily, I was not hurt, and the plane received slight damage (There is the streak of luck again. I could have been killed or disabled for the rest of my life). But I worked hard in my training, but never got the private pilots license for obvious reasons.
Chapter 4: “Becoming a Producer” The author explains how capitalism has changed from the simple mom and pop enterprises to huge multinational corporations which many and complex interdependent departments, each with a specialty. These businesses are so complex that the owners have delegated their responsibilities to professional managers. The author takes a page out of John Bogle’s book, “The Battle for the Soul of Capitalism,” when this author wrote: “We have managers pursuing short-run profits rather than long-term value, investors taking on too much risk because of screwed-up incentives….” Bogle would agree 100%!
Chapter 5: “No Romance Without Finance” Establishing long-term personal relationships especially with your spouse to building wealth is obvious and profitable connections. The author articulated two glaring and historical examples of marriages lasting longer than one generation: 1. The fifteen century Florence, specifically the Medici Bank, and the family associated with it. And, 2. the English financial family—the Rothschilds. Both my nephew and I married well. My marriage of 40 years led both of us public school teachers to amass wealth well above my expectations (we started with nothing). My nephew and his wife owned a very successful farming business and made them multi-millionaires. The four of us were on the same financial page regarding frugal living, investing, working hard, and saving from day 1. As so many of us know, that financial disputes has been a leading cause of divorces for many years.
Chapter 7: “Failing Forward” The author discusses the interesting and historical but obscure figure, Robert Morris, and why our U. S. history books don’t mention this respected revolutionary patriot. He made mistakes. The rest of this chapter is noteworthy because as newbie investors we will make mistakes. Life is about making mistakes, and what differentiates success from failure is one’s reaction. All the “how to be successful” books have said over and over, learn from your mistakes and move on.
Learning from mistakes sounds simple. However, our culture takes the harsh view of failure. No doubt failure is personal, and there is not much help “out there.” When I flunked the 2nd grade, I was convinced I was retarded, and the rest of my k-12 education was ruined. It was when I was adult, after years of psychotherapy, that I could confront those painful feelings that surround failure. It took a long time to recover, but I did, earning a Ph.D. at UCLA at age 48. The author writes the obvious, “Failures can’t be stigmatized if they are to be the source of learning.”
Chapter 8 “Why Everyone Hates Finance” Instead of using literature to explain the complicated mechanisms of finance through stories, he returns to literature to explain why finance is hated! The author cites one of Tolstoy’s short stories to illustrate how a peasant becomes wealthy with buying the land he worked on. After his first crops turned out to be so profitable, he bought his neighbor’s land and paid off all his debts. But it wasn’t enough. The former peasant was tempted with the prospect of getting more land. Unfortunately, he overworked himself and died.
My goodness, with stories like that from one of our most accomplished literature author in history, no wonder we have so many who are not interested in personal finance. I don’t know about you, but I think most of us don’t want the negative implications and severe consequences of greed. In this case, the land he owned was not “Enough” (Read my review on Bogle’s book “Enough” ).
If you think greed will not happen to you, think again! Both my late husband and I got the greed bug. We profited quickly from our meager investments right out of the financial gate in 1995 at the beginning of the technology bubble. We invested our money in the narrow technology sector. For the next five years, our portfolio rose to the stratosphere, and you know perfectly well where this is going. Starting on March 10, 2000, and for the next two years, we helplessly watched 70% of our portfolio get washed away, as if hurricane Harvey came to town, over $1.1 million vanished.
The author then proposes the idea that since wanting more is against our society’s basic ethics, and that finances and investing have inherent risks of losing, the usual reaction is distaste at best and hating as worse. People have a natural aversion to risk, and they are naturally fearful of the stock market. There are good historic reasons for being fearful. 2008, 2000, and 1929 are the constant reminders to stay the hell out of the stock market, and the precise reason why insurance companies are so profitable. The author cites behavior science studies that show that people experience more intense negative feelings of losing a dollar than positive feelings of gaining a dollar.
He ended this last chapter and the book with a positive and compelling story about a woman named Alexandra. She understood the difference between luck and skill, and most important, the difference between “tales of hollow accumulation and insatiable desire” with “tales of heart and hard work.” I don’t have to tell you which tales the author recommends.
In summary, the problem with previous qualitative attempts to make sense of finances for the greater good is that they are unique to the author’s favorite stories, personal knowledge, and experiences. This book replicates previous work but also takes it to a higher level. The connections between finance and worldly pearls of wisdom are unfortunately for academic readers than for the general public. It is not an easy read for readers who know their personal finance.
Speaking of previous work, I was perplexed that the author did not cite the great work of Jack Bogle, the now legendary pioneer of Vanguard and his indexing contribution. Vanguard has developed into the largest and most respected mutual fund company in the world (Yeah, Blackrock is bigger, but it serves primarily institutions). I believe Vanguard’s success is due in large part to what “The Wisdom of Finance” is trying to articulate. Bogle’s ideas would fit with the author’s and his chapters 3, 5, and 8. Mr. Bogle’s two books, “The Battle for the Soul of Capitalism,” mentioned previously, and his direct work of connecting finance to the humanities in the book, “Enough.” His indexing strategy alone gave us ordinary investors a huge (and extremely low cost) advantage by offering passive strategy investments (Evidence found in chapters 3, 5 and 8). Because of the built-in none/low trading of indexing, much of our investment money that would have gone to Wall Street’s traders are deposited in our pockets instead (Chapter 8).
In Bogle’s Introduction of his book “Enough,” he explains the origin of the unusual title. He describes a party given by a billionaire and which guests, author Kurt Vonnegut informs his colleague and friend, Joseph Heller, “that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel “Catch 22” over its whole history. Heller responds, Yes, but I have something he (hedge fund manager) will never have…enough.”
I hope that The Wisdom of Finance will be a small stepping stone to a new academic discipline. The author writes that both the literary (qualitative) and scientific (quantitative) disciplines need to cooperate to explore this “largely unexplored terrain.” I hope that eventually, this combined work will become mainstream. But it will require a lot more work, discussion, and verifiable goals. We are not even close yet. In the meantime, we regular investors and readers will connect our dots to our individual lives so we can make sense of the financial industry. Hopefully, the inclusive and life-affirming discussion of all things financial will replace the current cold, heartless, isolated from life and intimidating financial sophistication. This work has already been satisfied, in my experience, and countless other do-it-yourself investors. But many of my friends, most of my family, and the clear majority of the investing public remain in the financial dark, and that should be everybody’s concern.
While this new discipline is currently just a dream, however, much of our civilization and its social, political, and technology developments originated from dreams and dreamers.