Karat Stick Opening Letter
Getting Started
02/05/2023
As the first entry in my newsletter series, which I hope to produce weekly, it seems appropriate to shed a bit of light on how I came to title it “Karat Stick”. The word “karat” is associated with the purity measure of gold, which has been an important store value of wealth throughout human history. The higher the karat rating, the more valuable the gold with 24-karat being 100% pure. The word is also a homophone for the vegetable that herbivores love to eat, so much so that you can use it as a bargaining chip to encourage productive behavior. This is where the “stick” comes in. Yes, I intend to conger up images of a mule pulling a plow while chasing a carrot dangling from a sting tied to a stick anchored to its yoke. No, I am not suggesting my readers are mules, but all human action begins with an incentive. “Stick” can also imply a measuring stick. Lastly, the web domain was available so that sealed the deal and now you’re reading a newsletter with a slightly silly name that I’m rather fond of.
Now that is out of the way, let’s get into the content. I will channel Yogi Berra when I write ninety percent of the wealth building game is half mental. Over the course of this past decade, financial news has crept more and more into the mainstream with opinions than ever on the subject. While economics and investing are related, they are not the same thing but they do share one thing in common: a lack of scientific method that can prove a theory. Therefore, we are left with nothing but theories, opinions, and a guy on CNBC honking horns and making all sorts of ruckus. This puts people in a constant state of uncertainty which leads to fear and ultimately sub-optimal choices. Imagine the mule you envisioned earlier without a carrot to chase but a bunch of mule-drivers with whips cracking all around it. It would be chaos and the field would never be plowed.
The common question I get now from investors is “will there be a recession?”. The short answer is “yes”. I’m always listening to and reading content created by major economists and market analysts. Most of them disagree on the severity and/or the timing of the next recession, which leads me to the conclusion that most are wrong and any of the predictions that happen to be correct should be attributed to luck. After all, there are lottery winners. So, what do we do to protect our stash of gold? Counter intuitively, we rely on human nature by defying our own human nature. Nearly all people on this planet desire a higher quality of life and they show up to work each and every day to see through their visions, even if passively. This function is one reason why our economies grow by propelling the innovation cycle. This isn’t to say we do not experience setbacks from time to time, but the forward progression seems to always resume. This is as close to an economic law as there is. By acknowledging this human nature, we can more confidently defy our instinctual behavior to run away from the discomfort of uncertainty. Understanding why things tend to move forward is key to minimizing financial anxiety, and there is no requirement to predict the future with any fidelity. It enables you to follow the sage advice of economist Richard Thaler, “For individual investors, the best strategy is benign neglect. Create a sensible long-term portfolio, and then ignore it.”
Next week we’ll dig more into what a sensible long-term portfolio looks like. There’s no shortage of differing opinions on this and my take on this doesn’t imply it’s the only correct one. There are many paths to success here and it’s a shame that we feel the need to polarize our opinions just because we want to be foam finger #1. Regardless of your portfolio strategy, if you fail to conquer your fear of the future then your strategy is likely to fail you. I challenge you over the next week to think of how your life has changed for the better over the past five years because someone out there followed their carrot to better their own lives. I can think of countless examples. How likely is this to change?
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.