The importance of Fundamental knowledge

Recently, I finished a match puzzle designed by my friend, a relationship consultant. There are 3 male photos on the left side. And their corresponding self-introductions are on the right side.  The participants should link one of these photos to one of the text form introductions. My answer to the connect the dots puzzle was right. The correct rate among 11 participants is 27%.

That doesn’t mean I have a sharp eye for people. It’s the fundamental design principle that helps me make the right decision. For example, the third man in the photo dresses a simple tone, blue and white t-shirt with a pair of white glass. The element of his cloth and glasses only contains line shape with even-spaced wide. The angle of the shape is 90 degrees. This style reveals that the man is a logic-minded person.

Everyone knows fundamental knowledge is more important than applied knowledge. However, only several persons would like to practice it.

What I’ve learned from the book “The Most Important Thing” by Howard Marks

The author, Howard Marks, is known in the investment community for his “Oaktree memos” to clients which detail investment strategies and insight into the economy.

Quotes From The Most Important Thing:

  • What distinguish successful investors from normal ones is how they behave in circumstances to which their style is not mostly well-matched.
  • Avert mistakes that are usually led by other investors’ lack of caution, laborious effort, and the stock’s swift pendulum move.
  • Top investors sometimes misjudge things; however, they do right most of the time.
  • People often think they could predict the future, assuming the world can be modeled by merely using sequential steps. Fewer people know what lies ahead, but we could know where we are by observing the people around us. Therefore, devoting your time to learn things others don’t.
  • When speaking to risk management, we avoid doing the wrong things rather than doing the right things.
  • The well-known quote “Don’t put all your eggs in the same basket” does not imply that holding different elements are better. Diversification works only if they react differently to a given circumstance.
  • It takes time to prove your decision are right.
  • Resisting excessive profits is an imperative attribute for a lot of successful investors.
  • Critical thinking must overcome emotional feelings.
  • Something about contrarianism: Contrarianism can help prevent risks, but it doesn’t make a profit all of the time. Standing against the crowds is not enough. You must  figure out why the crowd is mistaken based on reasons and make a profit from the mistakes the crowd is making.
  • It can be dangerous to use leverage to buy more assets that provide low returns and narrow risk spreads.

Book review of The Essential Retirement Guide

This is a financial planning book focused on middle-income or upper-income workers. Low-income people, defined here as at the bottom of 30 percent or so of the workforce, definitely need retirement target income exceeding 70 percent of their final pay. They’ve already been well taken care of with pensions from government programs. 

The keynote of The Essential Retirement Guide:

  1. Financial plans must be taken before we are getting older.

When coming to the financial abilities, people in their 80s were generally more confident than those in their 60s, even though the older ones scored barely half compared to the highest. While older test subjects scored quite poorly by any absolute or relative measure, their confidence in their financial abilities was actually higher than that of their younger counterparts. Preemptive measures need to be taken. We should handle this while we are still young enough to use whatever insights we have at our disposal.

2. Your financial strategy should be simple. 

Keeping your financial strategy simple may not be an optimal choice, but it is better than varying the mix for the wrong reasons. There is no correlation between high fees and high returns.

3.Exposing yourself unduly to downside risks is irrational if the only upside is to produce a windfall gain that you do not really need.

4.Long-term care insurance is not an effective choice

Insurance is most effective when 

  • The potential losses from which you are seeking protection are easily understood and quantifiable. 
  • The cost of the insurance seems reasonable relative to the coverage.
  • Any losses over a given threshold would be fully reimbursed by the insurance

However, Long-term care insurance  doesn’t meet the criteria. 

5. Don’t overspend

In a consumerist society, our reach tends to beyond our grasp. If you make $80,000 a year, pretend as if it were just $70,000 and save the rest. 

In summary, the author, Frederick Vettese, specializes in actuary and has spent his whole career in retirement consulting and workplace pension plans. He provides a lot of insights about retirement planning using his actuarial expertise. In addition, he uses a lot of contextual scenarios in explaining concepts such as wealth target and workplace pension plans. It’s a highly recommended book.