Today I’ll take a break from our regularly scheduled program on money to exhort precisely the opposite focus in our lives.
Today, money doesn’t matter. At all.
No, its not really “opposites day.”
But it is Thanksgiving week, so it seems like the right moment for this break.
Probably the first and last time you’ll see me referring to Scripture
In church the other day we read the classic Gospel story about the Pharisees trying to trick a canny JC[1] into advocating either dodging taxes owed the Roman Empire (effectively, prosecutable treason), or betraying his religious followers, the Jews, who felt oppressed by the Roman Empire.
His clever response began with noting the profile on a Roman coin and asking the Pharisees to identify the image. As we know, they replied “Caesar’s.”
That prompted JC’s politically savvy response-for-the-ages:
“Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s.
Finance guy now says ‘forget the money’
In my private life and in my writing and teaching, I play the role of “finance guy.” When a political or personal topic arises in discussion, I begin my response with “Well, as a finance guy, I see it this way,” or simply “follow the money,” and I give a rational, money-optimizing or finance-informed perspective. That’s my role.
In other words, I’m constantly urging friends, students, and readers how best to render unto Caesar the things that are Caesar’s.
But you know what? Forget about all that this week. Because, again, this is Thanksgiving week.
Money has nothing to say about all of the most important things in my life. My birth family. My wife. My daughters. My physical health. My inner peace. My limited time.
My birth family
Like everyone else I had no control over this, but wow, did I get lucky. My family of origin is smart, kind, and successful. Money cannot buy this kind of luck.
My wife
I won the relationship lottery. And thankfully, I know it. Had I not won, well, there’s no price I could pay to get someone like her in my life.
My daughters
Money has really not entered their world yet. I love that about them. They can construct a Halloween costume out of a discarded cape, a leotard, and an ironic moustache necklace, as long as it involves glitter. At Christmas, the box and wrapping will fascinate them as much as the present itself.
They are shockingly beautiful and just like the girl in that One Direction song, they don’t know it. They absorb the world’s energy and reflect it back so brightly that it makes me squint sometimes when I look – I mean, really look – at them.
What is Caesar’s coin but a dull, bland thing?
My physical health
I am temporarily blessed with excellent physical health. Do I deserve this? Not really, because I eat a lot of donuts. But wow, I appreciate it. Yes, my access to modern health care – I know, that requires money – helps me quite a bit. But in the long run, like everyone else alive right now, I’ve got a limited amount of fine health remaining. Money will never effectively stave off the inevitable decline.
Could a couple billion dollars halt that process? Nope.
I’d better appreciate it now, because my good health is a precious, miraculous, temporary, gift.
Inner Peace
Sure, I’m just as periodically wracked by undulating waves of anxiety, self-loathing and megalomania as the next 42 year-old white guy – so I don’t mean to imply that I’ve achieved Dalai Lama status here[2] – but I also appreciate that I have my moments of clarity and simple, happy, contentment.
That feeling never comes from money.
No amount of 401K padding can buy those moments. No high-interest money market account yields me an ounce of that contentment.
Adding three more zeros to my net worth – and I’ve met a few people in my life who have that – will not expand the frequency or duration of my moments of peace. Based on the evidence I’ve seen, the opposite occurs with additional zeros tacked on to one’s net worth.
“Mo’ money, Mo’ problems,” as the late 20th Century American poet Notorious B.I.G. once wrote.
Time
You can’t buy more time at the store.
Money cannot halt time, freezing my daughters at this point in their lives.
Money will not grant me another perfect Saturday with my wife.
Money cannot provide the endorphinous joy of a long healthy run along the San Antonio River.
That hour I spent reviewing a finance spreadsheet while my four year-old tugged at my arms to pay attention to her last week? Yeah, I know, I can recite that Harry Chapin song.
Don’t blow any more of those chances, I try to remember to tell myself.
Forget Caesar this week
This Thanksgiving week, I’m trying to render unto God all the things that are God’s – as long as that God is not money.
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[1] Referring to ‘JC’ just makes me happy because it reminds me of Owen Wilson’s born-again-Christian character in “Meet The Parents,” in which he tried to find a common bond with Ben Stiller’s Jewish character by saying earnestly “Hey, JC was a Jew!”
And by “much interest” I mean the story made me want to stab my own hand with a sharp pencil.
I hate this sort of thing.
Not because of straight up corruption
Let’s leave aside the obvious problem of ‘economic development’ schemes like this, in which public entities give targeted incentives to a specific, private company: You know, because private individuals who benefit may feel quite ‘grateful’ to their public sponsors. Public sponsors in turn – elected and appointed officials – may then have an incentive to direct public funds to private beneficiaries to keep the ‘gratefulness’ cycle going.
That’s all obviously just straight up corruption and not really what I’m aiming for here in my critique of city-directed ‘economic incentives’ for private companies. [1]
What I really hate about this is something quite different, having to do with three business concepts: selection bias, market efficiency, and the structural short-run conflict between entrepreneurial goals and public policy goals.
Taken together, they greatly reduce the odds that this type of economic development works out for the public good in the long run.
I’ll address these in order.
Selection bias
Would you like your city (or state, or county) to grow companies focused on wooing public investment and public ‘economic development’ incentives? Or would you like your city to grow companies that focus on profitability without a public subsidy or public investment? Because the way you attract companies to your city (or state, or county) introduces a real selection bias to the pool of companies you end up with.
In my experience, the kind of startup company that takes public money – with all the attendant scrutiny, ‘job creation’ requirements and ‘salary’ minimums – is a different sort of company than one that achieves sustainability without that public money.
Market Efficiency
Private investors constantly scour the market for small but growing companies that provide a reasonable chance at future profits.
Small but growing companies in turn often seek direct investments from private investors known as ‘angel’ or ‘venture’ capitalists.
It’s not a perfect system, and market inefficiencies occasionally arise.
But when a company turns to public funds like this, what that signals to me is that private capital sources – the professional angel and venture capitalists – have already declined to invest in the growth of this company. That’s typically because professional angel and venture capitalists do not find the risk/reward profile of that investment sufficiently compelling.
Now, professional investors may be wrong to have overlooked the growth and profitability potential of these medical device companies.
The angel investing market may be inefficient.
Who knows? Maybe the City of San Antonio Economic Development team may have a market-beating strategy for identifying a positive risk/reward formula that private investors have declined to take. I mean, it could happen, right?
But I doubt it. And I would never bet on it.
The short-run conflict between entrepreneurship and public policy goals.
Look, here’s the biggest problem.
Public officials want to be seen to create “jobs.” At “good salaries.” That’s fine.
But entrepreneurs don’t seek to create jobs. At any salary.
Entrepreneurs, at least the good ones, want to create the least number of jobs possible. I’m not saying this because entrepreneurs are inherently mean-spirited, but rather, because hiring people is expensive.
Successful small companies – and big ones too – have to constantly try to eliminate jobs to make a company financially sustainable. The market is too darned competitive to survive when you’re burdened with too many people on the payroll. If public officials get the chance to dictate the number of jobs, and the salary minimums of jobs, I guess I have my doubts about how that business is being run.
You show me an entrepreneur willing to be told by a city entity how many people to hire, when to hire them, and what to pay them, then I will show you an entrepreneur who isn’t going to make it in the long run.
Because that’s what Romney’s firm Bain Capital is good at. They buy a company, wring out expensive costs (all those “good salary” jobs!) and then resell. In the short run, the more jobs you eliminate, the better. I’m not saying this to besmirch Romney’s record. I’m sure he was a fantastic capitalist. Cutting costs is what capitalists, and entrepreneurs do, and often that means eliminating jobs. But Romney as “job creator?” Give me a break.
I mention this to illustrate the short-run differences in goals between entrepreneurs and public policy officials
Ok, now back to San Antonio.
I hope I’m wrong
I hope to be completely wrong about this $1.75 million direct investment. Despite my misgivings, I will be thrilled when these three startup medical device companies spur innovation, trigger job growth, add to the ‘entrepreneurial ecosystem’ and even generate a positive return on public capital.
It could happen! I hope it happens!
But I would never, ever, choose to bet on it with my own money. And I’m sorry when the city chooses this for me.
[1] That kind of obvious corruption is what the New York Times had in mind in pointing out in 2012 that Dallas-based tax consultant G. Brint Ryan worked to secure tax breaks for private corporations in Texas while personally donating $250,000 and $150,000 for the Governor and Lieutenant Governor respectively. I don’t mean all that, since it’s all too obvious how each group benefits there at the expense of the public good. I mean, who could deny it with a straight face?
Peter Kovac wrote Flash Boys: Not So Fast, as a point-by-point refutation of the major premises of Michael Lewis’ Flash Boys. At the end of Kovac’s book – well actually, after just the first few pages – you’re left with the strong impression that Lewis wrote a tale built on speculation about a dramatic – but not particularly true – conspiracy theory about high frequency trading (HFT) and the US equity markets.
I’m reminded of a core reason I started Bankers Anonymous
After the 2008 crisis I got tired of reading the journalistic errors and omissions about mortgage bonds and credit default swaps. Having worked in those markets, I know how frustrating it can be to read some overly simple or mostly false journalistic narrative in the New York Times or Wall Street Journal.
I would think: “No! That’s not how it works.”
Then I’d end up shouting at the breakfast table, angrily poking the newspaper,[1] scaring my small daughters and leaving my wife eager to get to work as quickly as possible.
That’s one of the reasons I started Bankers Anonymous. To offer better explanations. The other reason was to maybe learn how to write a book.
Speaking of writing a book. Can I admit to a bit of jealousy?[2]
Kovac is a friend. Until recently he worked for a high frequency trading firm. When he read Michael Lewis’ Flash Boys, the errors and omissions about his industry bugged him so much that he decided to write a response.
A few months and 115 pages later, he has written the definitive take-down of Flash Boys.
Kovac is funny, informed, and he has specific examples and excellent metaphors to make the somewhat opaque world of high frequency trading accessible to us.
Who is Pete Kovac?
Kovac’s biography is a key to understanding his response to Michael Lewis’ book.
He started as a programmer for his HFT firm, named EWT, in 2003 and then rose to Chief Operating Officer, overseeing everything from compliance and working with regulators. I’ve footnoted a fuller description of Kovac’s bio here.[3]
As Kovac himself points out, you could read his biography and immediately think: “Oh, just one of those insiders, defending his own industry.”
Naturally, one of the inherent problems of understanding finance is that the experts tend to have a stake in the system somewhere. Outsiders, with no stake, tend to not be experts. Well, Kovac’s an expert and an insider. That seems relevant when evaluating an outsider’s claim about an industry.
Nevertheless, most importantly, he’s the kind of expert that Lewis didn’t consult in the course of writing Flash Boys.
Lewis’ problem in Flash Boys
Lewis’ key advantage over most other financial journalists has always been his semi-insider status. Meaning, he actually worked as a salesman on the Solomon bond-trading floor for two years, and he actually understands the mindset and motivations of the Street better than most scriveners.
And yet, the biggest problem I found with Flash Boys is that he seems to have had no access to actual high frequency traders, making him far more outsider than insider this time. This makes his theories on HFT more speculative than they ought to be. In my earlier review of the book, I felt his lack of specific information or details or access on HFT led him to demonize and simplify their actions.
In his earlier books, the ‘bad guys’ tended to be at least humorous and specifically obnoxious, not facelesslessly manipulative and devious. Unfortunately the HFTs of Flash Boys are more faceless cartoon villains than real villains.
Are HFT engaged in a vast front-running conspiracy against slower investors?
You kind of have to read Kovac’s full refutation of the vast conspiracy, and also know something about market structures and market orders to follow this, but I trust that – at the very least – Lewis was speculating about how front-running by HFTs might work. But Lewis didn’t really have any idea what would work or not.
Kovac goes point by point to show that Lewis’ speculation is basically impossible and nobody Kovac’s ever worked with in the HFT world could make money that way.
In addition – and this is probably the strongest part of Kovac’s book – Lewis’ description of what might have happened is so rife with errors or impossibilities according to the way the US equity market actually works that Kovac is left stunned.
Reading Kovac’s book I’m reminded of me, poking angrily at the morning paper “NO! It can’t happen that way! I can’t believe you’re claiming this and non-financial readers won’t know how to see through your BS! Argh!”
What about Brad Katsuyama, the hero of Flash Boys?
Kovac is sharp-witted about the incredulousness of Brad Katsuyama, the protagonist of Flash Boys. Katsuyama set out to create a (relatively) slow-trading exchange in order to foil the HFTs.
Katsuyama repeatedly appears to believe in HFT actions and schemes that have little basis in the markets Kovac knew and participated in.
Far from a hero to Kovac, Katsuyama represents the legacy model of trading equities – expensive, slow, and self-interested.
When Katsuyama alleges a HFT front-running conspiracy that his new IEX exchange will correct, Katsuyama (in Kovac’s telling) becomes focused on his sales pitch even though his new exchange may be a solution in search of a problem.
Worse, Lewis appears to swallow and then amplify Katsuyama’s sales pitch for IEX, despite data and evidence that refutes their central thesis.
Want to know what else is wrong with Flash Boys?
Kovac’s book is a comprehensive, chapter-by-chapter, point-by-point critique of Lewis’ errors.
Here’s a few more examples that Kovac explains in detail.
Nope, HFT was already 20% of the trading volume on US exchanges prior to 2007. As Kovac points out, Lewis himself provides this data that undermines his own argument. In addition, US equity trading is only one small portion of HFT trading strategies. The others, with currencies, commodities, bonds, and futures, are unaffected by Reg NMS.
Did HFTs cause the 2010 Flash Crash?
A comprehensive review by regulators found no evidence of this, but rather a series of compounding triggers from multiples sources in the equity markets. Lewis dismisses the regulators as either dupes or self-interested, but I trust Kovac’s closeness to that trading situation, his professional contact with regulators, as well as his careful reading of the report.
Is trading data impossible to track and assemble for the purposes of uncovering frontrunning or wrongdoing – or “does the data not exist” as Lewis claims?
Kovac reports that every single trade, in addition to every single text, instant message, trading program and order gets tracked and recorded by all the exchanges and regulators. It would be, and is, possible to track bad behavior from HFTs, says Kovac, who has served in the compliance role at his firm.
Lewis makes the claim that tracking this would be impossible.
On a related note, Lewis paints market regulators as generally either compromised or behind the curve when it comes to regulating markets and high frequency traders in particular. Kovac, who worked professionally with many regulators over the years, found the opposite to be true.
Kovac compares them to the Supreme Court. They often passed judgment he disagreed with, but they were always thoughtful. Regulators laid out extensive reasoning for their decisions, and attempted to create fair markets for the general good.
Criticisms of Kovac’s book
Readers unfamiliar with Lewis’ Flash Boys may not follow along with Kovac’s rebuttals, as he takes a chapter-by-chapter approach to critiquing Flash Boys. It’s undoubtedly more interesting to read this if you already know the original work.
In addition, while Kovac is quite clear in his writing, there are moments of technical explanations – I’m thinking of the explanations of market orders as one example – in which I got lost a bit in the weeds. Less financially-savvy readers may suffer somewhat as well.
Finally, at times Kovac is so astonished by Lewis’ one-sidedness with the HFT narrative that he lapses into sarcasm.
When I’m really mad at someone or something I do this too, so I recognize it in Kovac’s writing as well. It doesn’t happen much with Kovac, but I can hear my own internal editor telling me “don’t do that.”
Final Analysis
As a result of Kovac’s book, I’m convinced that Lewis pretty much blew it in covering the HFT story. I’m still left with some questions – for example ‘how do HFTs really make consistent profits?’ and ‘should we be collectively worried about future flash crashes as a result of algorithmic trading, and how do we prevent that?’
But if you really liked and believed in Lewis’ narrative, you owe it to yourself to hear another side, from someone who actually knows the business.
[1] Yes, I subscribe to physical newspapers. Yes, kids, I was born when dinosaurs roamed the earth, during the late Mesozoic Era, or Triassic Period. Ha ha ha. Now shut up and keep scrubbing.
[2] File this jealousy under the label “Every time a friend succeeds, a little something in me dies.” I’ve been talking about writing a book for a while now, and he just goes out and does it. And it’s good! Damn him. *Shaking my fist.
[3] In Kovac’s own words: “I am an industry insider, the kind of person who could have saved Lewis from making some really basic mistakes. I started programming trading strategies in 2003. After years in the trenches, I moved into management and ultimately became chief operating officer of my firm, EWT. I handled regulatory compliance, risk management, finance, trading operations, and a portion of the IT and software development teams – and I had to know every aspect of the stock market inside and out. By 2008, our company was one of the largest automated market-making firms in the U.S., trading hundreds of millions of shares of stock daily, and had expanded into many other asset classes domestically and internationally. I left it all three years ago when EWT was sold to Virtu Financial (in which, in the interest of full disclosure, I still retain a small stake).
Those eight years at EWT provided me with a front row seat to all the events described in Flash Boys, and much more. During that time, I shared my experience and perspective in discussions with regulators and lawmakers here and abroad, advocating for the continued improvement of the markets discussed in the book. Many of my comment letters on these topics are publicly available on the SEC website. Even though I no longer work in trading, I can still get answers from a diverse set of close sources when a truly new question arises.”
“It’s easy to sit there and say you’d like to have more money. And I guess that’s what I like about it. It’s easy. Just sitting there, rocking back and forth, wanting that money.”
In the spirit of Jack Handey and his idle wish, I recently downloaded a budgeting app called Zeny.
Then, for one week only, I recorded my daily “indefensibles.”
Indefensibles, since you asked, are my own term for small consumption purchases that I did not have to make.
I don’t mean my kids’ after-school care, or the mortgage, or gas for the car. I don’t mean eating out with the family once in a while. I really mean things that are financially indefensible.
Take my expensive coffee habit, for example. Because in my life, indefensibles come mostly in the form of caffeinated beverages.
I figure the cost of a cup of coffee, ground and brewed at home, averages about 15 cents.
Instead of grinding and brewing at home, however, I choose, day after day, to buy expensive coffee at more than ten times that price per cup. Well, actually, multiple cups. Plus, of course, a snack once in a while to accompany my fancy coffee.
And yes, since you asked, my “indefensibles“ concept is inspired by Warren Buffett’s pet name for his corporate jet. When you have Buffett money, a corporate jet qualifies as an indefensible, rather than the morning latte. Which is just one of the small ways my life’s financial path has diverged from Buffett’s.
Anyway, I downloaded the Zeny app on my phone to track my indefensibles for a week after reading the personal finance classic “The Automatic Millionaire” by David Bach. He famously coined the term “Latte Effect” to remind us that purchasing small daily items — a morning latte, for example — had massive implications for personal wealth creation (and destruction!) over the long run.
After reading his book, I became curious. How big is my Latte Effect?
Here’s my data from Zeny:
Day 1: $11.80
Day 2: $6.45
Day 3: $2.27
Day 4: $0
Day 5: $8.58
Day 6: $11.04
Day 7: $0.
All of these expenses I annotated in the app as either coffee or coffee-and-snack related.
My total indefensibles cost for the seven days: $40.14.
Does that seem like a lot of money? Check your own indefensibles against mine for a week. Gum and Tic-Tacs at the register. iPhone downloads. Hulu membership. That third beer for $3.50 at the bar. Whatever it is.
Over the course of a year, my $40.14 per week of indefensibles adds up to $2,087.28 (calculated as $40.14 multiplied by 52 weeks in the year).
What if I invested $2,087.28 every year for the next 40 years in the S&P 500, until age 82 — at which point it will be 2054 and I will be living on my hovercraft, being served hand and foot by my ageless Rihanna-bot?
And what if that investment compounded at 10 percent per year? Then I’d have an investment pool worth $1,016,196.
What a coincidence! Because as I said in the beginning, I actually want to be a million dollars richer.
What? You don’t think 10 percent is a reasonable return assumption? Maybe not. Reasonable people can disagree.
But just so you know, the compound annual return from the S&P 500, assuming reinvestment of dividends, over the last 40 years was actually higher than 10 percent. Including the oil embargo years and stagflation of the late 1970s, the tech bubble bursting in 2000 and the Great Recession of 2008, the compound annual return including dividends from the S&P 500 was 11.7 percent.
If I achieved 11.7 percent compound annual return on investment over the next 40 years, my little pool of weekly indefensibles would grow to over $1.6 million.
Maybe you prefer I assume a more modest 6 percent future compound return? Fine, my indefensibles would only grow to $342,413.45. Which, while not the same as a million dollars, isn’t nothing, either. $342K would place me squarely above the average American adult’s net worth.
From skipping premium coffee!
Let’s look at the calculation another way, however. What if I hadn’t ever gotten addicted to premium coffee outside the home in the first place? What if, instead, I had begun saving myself from indefensibles at age 22?
Even with a modest 6 percent compound annual return from the market, my indefensibles’ savings would grow to $1.1 million between age 22 and 82.
So, I’m just curious — is there anyone else graduating from college this year who would like a million dollars without trying?
Look, every single person outside of the top 0.1 percent of wealth in this country struggles with one of two financial goals. Either you are:
1. Trying to reduce your personal debts, or you are
2. Trying to build up investments.
The same Latte Effect applies powerfully to both situations. Whichever goal you seek, you can decide to be a million dollars richer at the end of your life.
It’s easy. And that’s what I like about it. Just sitting there, rocking back and forth, not buying that latte.
It’s a bit hard to describe exactly why you, specifically, may need to read this book. But I’m assuming:
Each one of us needs to work on our soul in some way, at least some of the time
Prayer, broadly defined, is a good way to do that, and
Lamott has a magical way of explaining the ways and hows that prayer works for her, and may work for you.
Not a finance book
Help Thanks Wow does not speak to the traditional themes of Bankers Anonymous.
Except in this sense:
Money and finance can be a source of emotional stress for many people. What’s blocking us from realizing our goals may not be the actual dollars in our bank account, but something far less rational.
And also, in this other sense.
I find Lamott’s forgiveness of failure and pain an inspiration.[1] Her acceptance is a helpful tonic for my otherwise competitive, rational mind.
I kind of have this sense that finance – in all of its aspects – would be a lot more pleasant for everyone involved if it wasn’t so damned rational and competitive.
I really appreciate a book more if – like a good wedding – it makes me cry.
One of the hazards of reading Help Thanks Wow: The Three Essential Prayers in public is that, as the hammer of her prose hits your emotion-bone, you feel that ache in your adam’s apple and an inadvertent welling in the lower eyelids. Once in a restaurant, and then later, waiting at the gate to board a plane back to Texas, I put the book down, blinking rapidly in a lame pretense that the air had suddenly become dusty.
Lamott celebrates her weaknesses as proud life tattoos. You find yourself drawn in by her admitted flaws, and then possibly admitting those same flaws in yourself. She’s wickedly funny about herself, which takes the venom out of noticing that you yourself are a flawed person.
Looking for some grace
Lamott is a real 12-stepper. I am merely a “recovering banker” inspired metaphorically by 12-steppers.
Whether you are a real 12-stepper, or just a flawed person trying to step clumsily around your own ego to find some grace, Help Thanks Wow can put you in the right frame of mind.
Are you willing to take a risk and ask for help? What’s holding you back? Do you understand just how lucky you are? Could you feel beloved today? Did you notice, I mean really notice and give thanks, for the incredible miracle that you’re still alive? These are all questions I’m asking myself, today, after finishing Help Thanks Wow.
[2] Ironically, the worst finance book of all time,Peace and Plenty by Sarah Ban Breathnach, is an attempt to make personal finance less rational and more emotionally accessible. Ban Breathnach fails miserably in the attempt. Its 10 times longer than Lamott’s book, has nothing useful to say about personal finance, plenty of terrible ideas, a cringe-worthy writing style, and its dull-as-toast boring. Other than that though, it’s a nice try.
[3] And presumably a guide to writing without using clichéd phrases like ‘totally awesome.”
I joined my colleague at the San Antonio Express News to discuss the incoming Comptroller, as well as the fate of the controversial Texas Enterprise Fund.