Confessions Of An Economic Simpleton, by Paul Shirley

In June of 2008, I came home from Europe slightly tanner than normal, glad to be speaking English again full-time, and pleased that I had survived ten months on a windy island that boasts the highest suicide rate in Spain.

As part of my usual coming-home routine, which also includes multiple homemade pancake dinners (where I’ve lived in Europe, maple syrup is as rare as an openly gay member of the Tea Party movement), I sat down for a meeting with my financial advisor.  At the time, my investment portfolio seemed as fit as that guy at the gym who’s grunting his way through a fourteenth set of pull-ups just before a stop-off at the shake bar to mainline some whey protein.

But looks can be deceiving.  Just like Mr. Latissimus Dorsai probably has high cholesterol and a propensity for clogging toilets, my investments were in trouble.

That June, while the world’s financial system was preparing to swirl into the American Standard of history, I was coming off nine months as a dedicated peruser of The Economist magazine.  I’d read about the troubles of Bear Stearns and Northern Rock for months.  Even my economically illiterate eye could tell that something was amiss.

Compounding my sense of unease was a Barcelona beach-side reading of Nassim Taleb’s excellent The Black Swan, which outlines the impact of randomness on our lives, especially as that randomness applies to financial markets.  His message:  No one really knows anything, and to protect yourself against that, you should probably be ultra-conservative with 90 percent of your money while betting wildly with the other 10.

Taleb’s message struck an intellectual chord with me. I’m fascinated with our tendency to think, after the fact, that we’ve figured out why this or that happened.  Such smug retrospection usually sounds something like this:

“I know, I should have seen the divorce coming.  It was obvious on our first date that it wasn’t going to work, when she told me the reason the third season of Doogie Howser wasn’t as good was because we were seeing too much of Vinnie.”

Or:

“It was inevitable that the Palestinians would hate the Jews.  You should have heard how the Abyssinians used to talk about them.”

With Taleb’s words fresh in my retinae, and almost a year’s worth of Economist knowledge lodged in my brain, I sat in my financial advisor’s office and weighed my options.

My instincts, underdeveloped and largely based on others’ words, told me to get out while I was ahead.  But, because I’m an idiot, I didn’t trust those instincts.  What I did – boring numbers alert! – was rebalance my investments slightly, moving 10 percent of my money from equities (mostly mutual funds) to cash.

For illustrative purposes, let’s assume that, in June of 2008, I had $10,000 invested.  Call $10,000 the Paul Shirley Industrial Average (PSIA).

On September 29, 2008, the day the real Dow dropped 778 points, I was driving to Wichita for a book signing.  As I watched the Flint Hills flash past my windows, I called everyone I could think of – my accountant, my smartest uncle, the same financial advisor – in a search of advice.  I was tempted to make my own personal run on the banks – to get out completely.  I’d learned my lesson, I thought.  No reason to make the mistake twice.

But again, I did the wrong thing.  I stayed in.  Oh, I “re-balanced” a little more, but I didn’t make the rash decision that probably would have been correct.

By February of 2009, the PSIA was down to 6,350 and I needed to go back to Spain, where I knew I’d have limited access to information and a seven-hour time zone difference to manage.  With the market in semi-freefall and the panic of September fresh in my mind, I wasn’t anxious to be out of touch while the little money I’d made playing basketball evaporated into digital air.  I gave a light tug on my ripcord, moving almost half my remaining investment dollars to cash.*

We all know the rest of the story, at least on a macroeconomic front:  The market bottomed in March, “roared” back throughout 2009 (rendering my tug all the more ill-timed), and is now teetering in financial limbo, buoyed by consumer spending and federal bailout money, and dragged hellward by high unemployment and Greeks who think that the solution to a financial shortage is to go on strike.

As of early March of this year, and with my uneasiness peaking yet again**, I took a look at the PSIA, which stood at 8,065 (a loss of just under 20 percent) and thought, That’s enough.  Time to buy some CDs.

… thus missing last month’s bull market.

Have I made my point?  I’m terrible at investing.

As I’ve weathered a financial market that has behaved like a sine wave on bad acid, I’ve been searching for someone to blame.  We all have.  We’d like to attribute our financial bad fortune to someone – anyone, as long as it isn’t us.

“They shouldn’t have sold me that mortgage.  It was too confusing.”

“They shouldn’t be giving hedge fund managers huge bonuses.  It’s not fair.”

“There needs to be more regulation.  It’s all a mess.”

As I researched my financial follies for these 1,900 words of opining, I was saddled with a deep sense of dread – the kind that usually hits me the morning after I drink too much at a Flaming Lips concert and can’t recall completely whether I did anything inappropriate.  What I recognized about that dread was its source: Me.  I wasn’t angry because my financial advisor had led me astray (he hadn’t) or because the documentation was shaky (it wasn’t).

I was to blame.

I have a hunch that a similar feeling has inspired a public outcry for regulation and retribution.  Instead of doing the hard work of looking at ourselves, we’re taking the easy way out and searching for someone else to blame.

Fitting, really, since giving up on ourselves is what got us into this mess in the first place.

We’re lazy. And among the laziest: Me.

When I use the term “lazy”, I don’t mean it in the “broke brother-in-law who sits on the couch playing his second-hand Dreamcast instead of looking for a job” sense of the word.  I mean it in a more snobbish, “I’m too busy to be bothered with getting down in the muck to figure out this financial shit” sense.

When I bought my house, the beautiful furniture-holder and potential memory-maker that it is, I needed more money than I actually had.  So I took out a loan.  I gave up some power over my future for greater power over my present; I told a woman in Horton, Kansas, that I would make monthly payments to her bank in return for a large sum of money right then.  I agreed to pay her a fee – an interest rate – for this service.

In return, she and various titling agencies and inspectors and real estate agents took control of the rigmarole involved in buying a house.  I paid each of these people for their time, whether directly or indirectly, and in handing over my money, lost more control over the process.

I did all this because it was convenient.  In other words, I was being lazy.  I was washing my hands of the dirty business of the exchange of currency for real estate and taking a chance.  I was gambling.

Similarly, when I agreed to give a financial institution some of my money and then told the people running that institution to go out and do their best to turn a profit for me, I was gambling.  Historically, doing that – investing – has been a reasonably safe gamble, but a gamble nonetheless.  I gave up on due diligence and understanding; instead of investing in the ice cream shop – the one with the great waffle cones – that’s three blocks from my house, whose operation I could see and understand, I sent my money to a stranger so he could invest it in a huge corporation that neither of us could find using a GPS system and a séance.

With this loss of control – with this general laziness – comes risk.  Risk we seem to have discounted in our mad rush to blame anyone but ourselves.

Many would say, “Well, sure, there’s risk.  But we didn’t think there’d be this much risk. We didn’t think people would be so opportunistic and shark-like.”

When I’m faced with this logic, I want to scream, “HAVE YOU MET… PEOPLE?”

People are the same as they’ve always been.  Some of them behave in an ethical manner.  It’s possible that most of them do.  But many of them do not, and it doesn’t take more than a few, in the right positions of power, to make it seem like every human involved in finance is a scoundrel.

As our country (world) looks back at the financial mess we created, we seem to have forgotten to first look inward.  We talk about government oversight and shake our fists at the bloodthirsty men and women who “got us into this mess,” forgetting that we were using those same bloodthirsty men and women in the hopes that they would give us something (a return on our investment) for nearly nothing (our hands-off approach to investing).

We think we have to take one of two sides:  We say that we need to lock up the offenders and chain the financial system.  Or, we assume that the free market will solve everything.

So, what to do: String up the sharks?  Let them swim free?

Much like one’s position on beer-drinking, extremes don’t make for a good stance.  Drink twelve Heinekens every night and your liver will fail.  Live as a teetotaler and you’ll probably lose your mind.  And rock concerts won’t be nearly as much fun.

The answer isn’t to blame a lack of oversight of the very system we built.  Nor is it to assume that that system – that monolith of greed, corruption, and materialism, a monolith in which we would willingly participate, given the chance – will solve things for us.

Instead, we might have to go back to simpler investing philosophies and strategies – ones we actually understand

We might have to examine our own behavior, as terrible and weird and uncharacteristic as that might be, especially in this, a time in which we’re obsessed with others and their problems.

We might have to stop trying to find a scapegoat.

We might have to (the horror!) think for ourselves.

The alternative is more of the same, or worse.

As Nassim Taleb would tell us: It isn’t possible to predict the future.  But, as every mid-level philosopher any of us has ever encountered would note, it is possible to learn from the past.

Because I don’t want to see the PSIA go to zero, I’m hoping to start doing some of that learning soon.

Right after I finish these pancakes.

*To those who would say that investing is a long-term commitment and that I shouldn’t have been so worried about making day-to-day decisions:  You’ve obviously forgotten what the times were like.  I’m not sure anyone could guarantee with any certainty that we wouldn’t wake up the next day to a currency as useless as the original Turkish lira.

**I actually think I might be right this time; I don’t think people/institutions learned their lessons.  People (and countries) continue to carry more debt than I think they can handle.  But keep in mind that I’m almost always wrong about these sorts of things, as demonstrated above.

For more from Paul, click some of the fun buttons below…

Past work on FlipCollective.com.
To follow him on Twitter.
To befriend him on Facebook.