The Eye of the Beholder
Before the article, here’s what’s happening this week on The Best Interest Podcast:
Do you know someone who cheers for a particular sports team simply “because?” They usually have a mundane reason, like “I just liked their logo when I was a kid…so I started cheering for them” or “my dog was named Viking, so I cheered for the Vikings.” Fast forward 30 years and they are still diehard fans despite having no other connections to the team.
I know one fellow Rochestarian – I’ll call him Patrick for the sake of anonymity – and he’s “that fan” for the Kansas City Chiefs. As a kid, he liked the Chiefs’ colors. That’s all it took! Pretty funny.
But here in Western New York, home of the Buffalo Bills, it’s a unique time in history to be a Chiefs fan. The Chiefs have ended the Bills season in 4 of the last 5 years. We don’t exactly like the Chiefs…
As I write this article, our latest defeat to the Chiefs is less than 24 hours old. The sting is still there. And to make matters worse (for me, at least), the game was very winnable for the Bills. A few plays go one way or the other, and suddenly, we’re talking about the Bills finally getting the Chiefs’ playoff monkey off their back.
We Bills fans are upset today, and we’re talking about it. There are a few common sub-narratives to the Monday morning quarterbacking I’m hearing/reading this morning:
- Some of our better players – who had fantastic seasons – had bad games.
- Our offensive coordinator – who had a fantastic season – had a bad game.
- And..the refs!?! What were those calls?
I watched the whole game as it happened, and as with any live sports game, there are bound to be referee decisions you disagree with. But two calls in particular really drew the ire of #BillsMafia on Monday. The details don’t matter, but for those who are curious, I’m talking about the Worthy/Bishop “catch” and the 4th down non-conversion. Both calls favored the Chiefs.
I’m observing some funny behavior, and it’s the main point for writing all of this today:
- 99% of Chiefs fans (including “Patrick”) believe the referees got the calls 100% correct. Clearly.
- 99% of Bills fans (and, I’d point out, most neutral fans, the TV commentators – including the on-air retired NFL referee who is part of the TV broadcast for the explicit reason of sharing his expert views to the live TV audience) believe that the referees got the calls wrong.
Of course, there’s only one reality. The calls were either right or wrong. But the eye of the beholder leads to two polar opposite opinions about that reality.
In the bigger picture, this could be an article about behavioral biases as a whole. Humans discount things they disagree with. They discount things that cause them pain. They discount things they’re unfamiliar with. Etc, etc.
Instead, I want to focus on some specific examples I read or hear about regularly, where my particular version of reality seems to clash so harshly with what I read from others.
The Market: A Casino?
How do you view the stock market?
I see the stock market as an imperfect-but-effective way to invest in businesses worldwide. The values of stocks are tied to the earnings and future Growth of those businesses. Short-term gains are never promised, as they are subject to the emotional whims of millions of investors. Long-term gains are far more reliable, as they are a function of objective business fundamentals. This contrast is the inspiration behind Ben Graham’s aphorism, “…in the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Many others, however, see the stock market as a casino. And in two different ways, which I find simply fascinating!
Some see the stock market as an avenue to massive risk, just like putting a $1 million bet on a single roulette spin. Think meme stocks and options traders. It’s a pure gamble with huge upside and destructive downside.
Other “casino people” see the market as a net-negative gambling proposition played against experts who know far more than you. “The house always wins,” they think. And they are not the house. To them, the stock market is shark-infested waters, and they’re a clownfish. They would never invest in stocks, just as they’d never step foot inside a casino.
Where I see mathematics and probability, they see randomness and dumb luck. Where I seek calculated diversification, they seek lopsided bets. Behind the scenes, I know the market is a function of independent businesses hard at work, but they perceive a shadowy 3rd party with a thumb on the scale.
There’s only one reality. Only one of us is correct. Yes, I’m convinced that’s me…but so are the other characters in this little anecdote. Who’s actually right? I’ve leave that up to you.
Super Smart Tax Hacks? Or Super Illegal Tax Frauds?
When I explain the backdoor Roth process to a client, I sometimes get the very understandable question:
Well…are you saying this is legal? Or…is it a shady gray area kind of thing? I don’t know…it worries me…
I get it. Whoever first said “backdoor” sowed the seeds of indefinite doubt. In defense of the suspicious, there are many ideas in the tax world that are in blatant violation of the IRS code. Thankfully, the backdoor Roth process is entirely legal and, in fact, explicitly allowed by the IRS.
But the same exact “tax move” can be one person’s “hack,” another person’s “bridge too far,” and/or the IRS’s “…that’s simply illegal.”
Perhaps the most common one? The simple topic of business expenses and deductions.
Business deductions are the ordinary expenses necessary for running your business. A business can subtract the deductions from its income to lower its taxable profit. Your business earned $200,000 last year, but required $50,000 in expenses to operate? Easy. You’ll only be taxed on $150,000 then. It’s perfectly legal…but there’s a slippery slope toward the illegal mindset of “everything is a deduction!”
Coffee with clients and new work laptop? Those are fine deductions.
But new sneakers because “I walk from my car to the office?” Or the dog’s gourmet kibble as, “Moral support for the CEO.” That’s not gonna fly. Let alone the lakehouse mortgage payments as “Future location of team-building retreats.”
The same idea applies to offshore tax shelters, misusing Trusts, claiming false tax credits, and more. One person’s “aggressive accounting” is another person’s “Class C felony.”
The Financial Planner Value Proposition
Does a financial planner add value for their clients?
If you ask Vanguard, Morningstar, and Envestnet, the answer is an easy “yes” (assuming a reasonable fee structure).
A good planner is like a sherpa – they guide you through tricky terrain, keep you on track, and help you avoid costly mistakes. Between optimizing choices, avoiding panic, saving time, reducing Stress, lowering taxes, etc. etc., the value of a good financial planner compounds to a significant upside.
But many people out there disagree. In some corners of the (mostly online) world, financial planners are seen as little more than middlemen, cashing in on services that “anyone with a spreadsheet and an internet connection” could handle themselves.
In other news, someone called me this morning; they received a heated political text message over the weekend, resulting in their desire to completely liquidate their investment portfolio. Are we sure this person should be getting their financial advice from TikTok and implementing it on their own?
I get it. Not every “advisor” is doing good work in the interest of their clients. In my opinion, that’s every advisor’s cross to bear. But that’s not a reason to throw the baby out with the bathwater.
Everyone has an “Aunt Ethel,” as I call them, who has zero interest in being her own DIY financial planner, yet wholly deserves to receive financial advice in her best interest.
Pro tip: if you do talk to a financial planner or advisor, here are the 16 questions I recommend you ask them.
This is all to say that the world is a funny place. You and I and the rest of humanity can look at the same facts, yet come to vastly different conclusions.
I’m not going to dive further into the world of behavioral biases, but they are the culprit here. We are not robotic, perfectly logical fact synthesizers. Far from it. Our lizard-y, monkey-y brains play subconscious tricks on us all the time. The more aware we are of that fact, the better we’ll be at personal finances and long-term Investing (for sure), and dare I say, the better we’ll be at being “good humans.”
Go Bills.
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-Jesse
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