Maximizing a 401K

There’s an interesting investing idea in personal finance to be like Rip van Winkle. If investors don’t earn the market returns because they churn, maybe they would be better off setting it and forgetting it, of sleeping-on their investments.

I was reminded of this story because I forgot a password. Does invest like you forgot your password have the same flair? Eventually I logged in and checked our contribution amounts for 2020.

While poking around I wondered what a retirement account would look like if someone were to maximize their 401k ($19,500 in 2020) each year. Sometimes the government changes the limit of what an employee and employer can contribute to a retirement account. As someone who likes simple and effective plans I thought this was great financial advice. I could see advisors telling their clients, just aim to hit the max number each year and you’ll have this much.

I calculated the rate changes each year and found out that contribution limits change at about the same rate of inflation. Of course. The IRS calls these ‘cost of living adjustments’. Sometimes you just need to stumble on things yourself.

The S&P average over the last thirty years was 9.69%. The picture looked like this.

This doesn’t account for an employer match, social security, or other savings but it’s comforting to know that the real 4% withdraw at retirement is $93,000 annually.

Digging into this made me realize how much variation can occur in planning. Cost-of-living, family situations, businesses, multi-income families, income levels, mortgages, taxes, and so on can all swing the equation one way or another. Ditto for flexibility in needs and wants.

However, just because there is a lot to consider doesn’t mean there’s not a simple plan. Specific predictions are futile but ballpark approximations are possible, helpful, and a good way to frame potential outcomes.

Collaboration on Optimal Designs

One important thing Rory Sutherland’s book Alchemy did was remind people about the importance of subjectivity. In her talk, Balancing Order and Chaos in UX, Katie Dill (Lyft, Airbnb) talks about how Virgin Atlantic made people feel different even though their seats are the same size and material.

Mohnish Pabrai said something similar about Southwest, “I go on a Southwest aircraft and I’m in coach and I usually find I’m happy. I’m in a happier state of mind in coach in Southwest versus business in American. Why is that? I don’t know.”

On the easy metrics, Pabrai is getting less value. But he’s happier. There’s hidden metrics at play.

Companies like Virgin and Southwest or Disney, Dill explains, have an advantage because they own the experience. For marketplaces, like Lyft and Airbnb, Dill has advice on what a business operator can do to create the same perceived value advantage as “full stack” companies.

  1. Zoom out, “have a perspective on what you are trying to deliver, it’s not just one moment.”
  2. Look out, “where can the shit hit the fan and where can we solve for it prior?”
  3. Set the stage, “use guardrails.”
  4. Don’t overstep and smother the user’s quirks.
  5. Open up, “the community is the key.”

Good design (and its rewards) aren’t about the finished style but the production style. Design is about collaboration. Dan Lockton said, “When people feel they are being influenced in a way that doesn’t match their understanding of the situation they will rebel.”

The best designs serve users. The best designs pave desire paths.

We focus on design because of the potential upside. In his talks on The Hungry Brain, Stephan J. Guyenet brings up the optimal foraging equation.


That same approach works for design. The cost for a good design is relatively low and the gained value—especially because all value is perceived value—is relatively high.

Good design is why Pabrai likes Southwest, even though the seats are smaller. Good design is often hard to measure but the results show there’s something there.

Trees on Buildings are not Easy

On the 99pi episode, #385 Shade, Roman Mars and Kurt Kohlstedt talk about the trend of trees on terraces. Kohlstedt said:

“One of the things that always cracks me up when looking at their (architect’s) renderings is that you’ll see all the trees on the sides of the buildings and they’ll depict the plaza below with a couple of trees. I can’t help but think; if you want to go all green, the easiest way is to add more trees on the ground. Which makes you wonder, what is the purpose?

What’s the purpose? That’s a good question. Here’s a YouTube video of some ‘plans.’

I call this fancy recipe syndrome. It’s the idea that if a chef blogger shares a recipe it needs to be distinguishing. It’s hard to stand-out with simplicity, efficiency, and time-tested recipes. Though my favorite cookbooks, are just that.

Okay, okay. They’re standing out. What’s the big deal?

Well, on net, these green buildings are a zero. They cost more to build and maintain than they offset. Yet they persist. What’s up with that?

Whenever we see the illogical, it’s an invitation to dive deeper. Everyone is locally logical. Bob Moesta said, “the irrational becomes rational with context.”

There are multiple part-of-the-reason explanations but I’d guess the predominant one is the contrast between the visible and the less-visible and the idea of importance and unimportance. We tend to think that visible = important and when the entire side of a building is covered in trees our thinking fast reaction is, wow, that building must be green.

However so much is working against us, including how we see vertical versus horizontal spaces.

It’s helpful to remember that action doesn’t always mean effective. In productivity circles there’s the Cal Newport deep work ideas. In investing there’s the advice to, ‘don’t just do something, sit there.’ In architecture it might be to just plant more trees on the ground.

I was talking to a neighbor about refinancing a house and shared these calculations. Looking back, a re-fi is like putting trees on a building. It’s flashy, it’s easy to count, it makes sense. But in the scope of a personal budget there are much easier and effective things worth doing.

The Only Honest Sport

Sports are good case studies. The outcomes are binary, the statistics are plentiful, and the rewards are large. There’s glory, attention, and interest. What’s not to love?

The most recent version of this (on my radar) was the double-edge sword of luck. In his paper, (Kyle Siler) writes about how lucky breaks in football lead to job losses and job opportunities. One part:

“Luckier outcomes were conducive to the retention of coaches and players. Less lucky teams were more likely to replace coaches and players. In turn, people are credited or blamed for accomplishments that were at least in part out of their control.”

In an era where people emphasize the process and not the outcome, where resulting is a four letter word, this objectability makes sense.

Well, only sometimes.

What makes sports great: bountiful numbers, is also what makes it prone to errors. Al Davis had it wrong.

Image result for just win baby gif"

But Davis knew he was wrong, even as he said it.

Go Like Hell was a great book because it had great characters, the race was secondary. Bob Iger‘s most-important early lesson was that sport wasn’t mainly about broadcasting. My short ebook emphasizes the jobt-to-be-done of sport.

Al Davis knew all this. Davis is still relevant today because he knew that winning was secondary to relevance. Sports is about storytelling. Sport is about narrative. Talking heads are imperative to this. Analytics haven’t taken over sports because they’re not conducive to storytelling—at least not yet. That means there’s one sport, one champion, that understands this. The only honest sport is the WWE.

Millions of Dollars or One Ring?

Money solves a lot of problems and it’s a stable form of compensation. That makes it a great incentive.

Here, take this thing that you think is valuable and others think as valuable and thanks to the computer in your pocket you don’t actually need the thing but a code on a site that sends the digital version of the thing to someone else. Trust me, this works.

But money isn’t the only incentive. Eventually it’s not even the most important. However, not thinking about money as an incentive requires imagination. Nothing is official but here’s one reported consideration for the NBA.

This is a terrible idea.

Bill Simmons—who we like—understands why. In his version of the in-season competition, Simmons awards teams a better chance to win the NBA championship. In zero-sum competitions, people would give body parts to win. How much does the marginal million matter?

It’s not just sports. After a certain salary, company culture matters more than company checks.

Incentives are like a series of dials: culture, mission, pay, people, autonomy, and so on.

Bob Iger wrote that he and others stayed at Capital Cities because of loyalty. Plus it was a great place to work. Once in the Disney machinery things changed. Iger again, “If you stuck to your budget and behaved ethically, Tom and Dan (Cap Cities) gave you room to operate with independence…Disney was the opposite of all that.”

It’s great that money isn’t the only motivator. This allows for interesting solutions. If you need some ideas, try some Alchemy.

The Need for Speed

Tom Cruise Quote GIF by Top 100 Movie Quotes of All Time

You know a mental model is good if you continue returning to it. Taleb’s antifragility is like this. Munger’s emphasis on inversion. Another is Boyd’s OODA loop.

Run the numbers on a fifteen or thirty-year mortgage with the mindset to invest the difference and both are good choices. Avoiding mistakes is more than half-the-battle.

When I finished that post, I thought good choices were low variance. “Don’t be house rich and cash poor,” my dad advised. With too much house, a job loss would introduce a lot of volatility. Similarly, an emergency fund tempers variance. So does ‘living within your means.’

However, variance isn’t the first principle.

What matters more is response cadence. We’ll call this articulation of cadence and the OODA loop: Variance Response Time (VRT).

A public school teacher will have a high VRT due to the nature of hiring. With seasonal hiring and year-long contracts, a teacher must step into another industry or live off their savings. A large emergency fund (dollars are units of time) will make the transition more comfortable.

Medical providers will have a low VRT. While their emergency funds vary, a physician, nurse-practitioner, or medical assistant can immediately find work. With a lower VRT these people can recover from choosing from a mixed bag of good and bad choices.

A tree has the longest VRT. A force outside the normal ecosystem conditions and that’s it. Kaput.

While money, knowledge, and transfer (i.e. licensing requirements) will all affect VRT, so will complexity. It doesn’t matter how much money or knowledge someone has if they don’t know which question to ask first. Boyd’s first ‘O’ is Orient. Or as Steven Soderbergh put it, “If you don’t know where the camera should go it doesn’t matter what you’re shooting on.”

None of this is new but examples seem to help drive the point home. Catholic churches do read the same gospels each year. So, am I able to adapt quickly or am I setup so I won’t have to?

Competitive Advantages: NBA

It’s interesting to hear successful people talk about physical location as a competitive advantage. We should probably hear more of it.

George Lucas left Hollywood for San Francisco. Ken Burns lives in rural New England. Buffett is in Nebraska. Brent Beshore, successful in his own niche, operates in Missouri. All of these places are advantages, not disadvantages, to the participants.

Getting away from the cacophony of a major city helps someone do a certain kind of work. For these individuals, the loss of interactivity is offset by a new set of actions.

Daryl Morey spoke about this to Bill Simmons. Morey noted that in addition to no state taxes, Houston Texas had more to offer players. Great weather, fine recreation, good culture, and so on. In addition to dollars and moneyball, Morey has a large competitive advantage. I often wonder why the local Orlando Magic doesn’t offer more to their players about brand building, as one of the greatest brands in the world shares the same ‘magic.’

The nature of these competitive advantages came up in a podcast with Zach Lowe and Howard Beck who said (39:30):

I don’t think it’s fair to the fans when you treat every injury to every player like it’s a national security matter and the Nets have done that. That’s Sean Marks embodying the Spurs’ culture.

This is Marks’ mistake. He’s taken too much. While the Spurs have a great cultural reputation it was time-sensitive. The next great culture team will have to find the first principles and not the outcomes. It wasn’t that the Spurs kept things secret but that they did so for a reason. That’s the key, and it’s important to ask if that still matters.

At the 2019 Sloan Sports conference, Beck and Lowe were on a panel with Paul Pierce who said, “team style of play is created around their best player.” Any competitive advantage is contextual. The time and place matter just like the people and actions.

Ego, Null-Ego, Anti-Ego

One of Nassim Taleb’s contributions is reminding people of opposites. That the opposite of fragility is not robustness but anti-fragility. That absence is not the opposite.

With that in mind we’ll see that the absence of ego isn’t anti-ego (humility) but just null-ego. Ted Sarandos spoke on the Aspen Ideas To Go podcast about the early days of Netflix.

It’s easy storytelling that Netflix disrupted television. It’s convenient to label Reed Hastings a genius (no matter how much he emphasizes his luck). It’s a great contrast to say that Netflix landed House of Cards and no one else did. However the truth is always more complex.

Everyone, Sarandos explained, wanted House of Cards. The show was not like an indie-band that blew up. It was an auction and Netflix was the highest bidder.

In addition to the highest bid, Netflix had another competitive advantage. A null-ego. Sarandos said:

“We had to convince the talent, ‘Why do it with us?’ We famously gave them twenty-six episodes with no pilot and a promise not to give them any notes on the production. I did that because there was no reason they should have done it with us. We had never done an original anything.”

Ted Sarandos

Sarandos and Hastings didn’t have an ego and that served them well. Jason Blum said that this is his advantage too. Michael Ovitz wrote about this too, noting that daytime television didn’t have much glitz and glam but it did pay the bills.

Sarandos continued: “at the beginning (the light touch) was out of necessity. I didn’t have enough people and I told David Fincher, ‘You don’t want me giving notes.’ I knew enough people who had shared enough horror stories.”

This decentralized command is common for high functioning organizations with great culture and talented employees. Warren Buffett has said to, “hire well and manage little.” Both The Simpsons and Seinfeld were famously no-note-sets.

Sarandos understands this, “The real art of what my team does is pick the show runner and then give them the tools they need.”

However, interviewer Derek Thompson and Sarandos talk about why this doesn’t happen. It’s the belief that activity is good. Taleb wrote about this too:

“Ingenious interventionism is very persuasive across professions…if you supply a typical copy editor with a text, he will propose a certain number of edits, say about five changes per page. Now accept his corrections and give this text to another copy editor…and you will see he will suggest an equivalent number of edits.”

Nassim Taleb

Like the Hollywood-note-machines or Nassim’s editors we can often think of change as good. However, sometimes all it takes is the removal of something harmful rather than the addition of something helpful.

Always Fix Your Weaknesses

On the Wharton Moneyball podcast the trio of Eric, Adi, and Cade talked about betting lines for the upcoming weekend in sports and they brought up a good point: Liebig’s Barrel.

The idea is that a barrel can only hold as much water as the shortest slat. In the context of Wharton Moneyball the trio discussed if Jimmy Garoppolo was an elite quarterback. Adi said he might be “mediocre,” to which Cade replied, “No, they’ve got a great coach and a great system, and a great defense. They’ve got enough quarterback.” Eric added, “If both teams play to their abilities I think the 49ers win the game.”

From the sounds of it, the ‘quarterback’ slat of the barrel is about as tall as the others, and tall enough to win the game.

‘What to do’ is an allocation challenge. Good capital allocators tend to succeed. It’s amazing how much the leaders in William Thorndike’s book overlap with leaders in any successful organization. He writes, “As a group they were, at their core, rational and pragmatic, agnostic and clear eyed.”

What do you do? Improve strengths or weaknesses. It depends, but not in football.

In football the impact of any one player is small, though the quarterback has increased in importance. The football ‘barrel’ has many narrow slats: offense, defense, coaching, training, analytics, and so on. So fix weaknesses first.

But wait, there’s more! Both randomness, situation, and skill mean that teams don’t know who great players are. Talent evaluation, commentators joke, is having a generational talent every three years. So if it’s difficult who’s the best, fix weaknesses first.

And if all that weren’t enough there’s the idea of diminishing returns. It costs more to make a seven an eight than a four a five. So fix weaknesses first.

In any capital allocation decision it often makes sense to avoid paralysis by analysis. One way to do that is find a weakness and make it better. Then, find another.

Truth-Default, Podcast-Default

How do you believe someone?

It seems like context is really important. Used-care-salesmen face an uphill battle on the field of ‘reputation’. Businessmen in suits have some kind of unconscious advantage. Then there’re podcasters.

Why are podcast people so persuasive?

I wondered this after looking up another ETF by another ETF operator and podcast interviewee. They always seem to have good ideas and my rationalizing brain runs faster than my legs on my podcast runs. Negative splits are a joke compared to the legitimization I can do. Well, you do need to zig when everyone else zags.

Part-of-the-reason may be due to something Dr. Tim Levine (YT) calls “Truth-Default Theory.” The thinking goes that Truth-Default allows coordination.

The part of Levin’s talk that related to my podcast persuadability was when he addressed couples. In one study they collected college couples and told some couples that one might be lying about some things (it was a large collection of statements to hide the true nature of the study) and they told other couples nothing of the sort.

For couples who received hints of deception, the lie-spot-rate was slightly above average (60%). However in couples with NO hints the rate terrible. It was so bad, Levine said, “During debriefing we had several subjects deny the nature of the experiment and tell us their partner did not lie to them and we were surely mistaken.”

In a study of political agreeableness, there was a humanizing element to hearing someone’s voice rather than reading their words. This is may be what happens in podcasts. Listeners subscribe to things they want to hear (confirmation tendency) with people they enjoy listening to (liking tendency) in a medium (McLuhan) that is more persuasive.

Pile on Levine’s theory that we default to believe. He said, “My theory is that absent some kind of prompting, thoughts of deception don’t even come to mind.” The payoff to believing must be worth it.

Image result for if you want to go far go together

On a Christmas walk with my father-in-law, we covered a lot of ground in both sidewalk and ideas, and one that we touched on was fasting. I explained that I believed in fasting without considering the science. In fasting, there’s nothing to sell.

Constant vigilance is impossible and unwanted. Truth trust leads to cooperation–which got us here. However, an awareness might help at least avoid the situations that aren’t win-win.

Thanks for reading. More around this idea on Twitter.