This month, we remember the goal of investing, think through the psychological cost of losing access to part of your portfolio, and see that behavioral finance hasn’t changed in 75 years.
#1 – “Buffett: The Making of an American Capitalist” by Roger Lowenstein
“What is one really trying to do in the investment world? Not pay the least taxes, although that may be a factor to be considered in achieving the end. Means and end should not be confused, however, and the end is to come away with the largest after-tax rate of compound.” – Warren Buffett (emphasis added)
This seems like a simple concept, yet many taxable investors lose focus on the ultimate goal of investing. For example, tech employees holding concentrated positions in company stock or RSUs often hesitate to sell, pay the tax bill, and reinvest the net proceeds into a diversified portfolio. With the benefit of hindsight, as many single stocks have fallen significantly from their highs while broader index funds have continued to grind higher, it becomes clear that taking the upfront tax hit would’ve yielded far superior long-term after-tax returns.
#2 – “Living Poor to Die Rich” by Nick Maggiulli
“Once again, this is great financially, but think about what this strategy does to you psychologically. As it generates more gains, it lowers your likelihood of ever selling these positions. Why? Because, in my experience, people hate paying taxes more than they like making money. As a result, you can end up stuck in the strategy.” – Nick Maggiulli (emphasis added)
The psychological cost of having a portion of your portfolio frozen by large unrealized gains is greatly underappreciated (and unsurprisingly omitted from marketing materials for “tax alpha” strategies). This article raises an interesting thought experiment: Would you rather earn $500,000 tax-free profit or a $1,000,000 pretax profit that incurs $400,000 tax bill (leaving you with $600,000 net profit)? Mathematically, the second option is clearly better, but behavioral finance suggests many investors would choose the first option just to avoid the pain of writing a big check to the IRS.
#3 – “The Intelligent Investor” by Benjamin Graham
“Instead of buying and holding their stocks, many people end up buying high, selling low, and holding nothing but their own head in their hands.” – Benjamin Graham
The “father of value investing” filled this 1949 classic with timeless wisdom. This quote is a blunt reminder that long-term investment success requires structural safeguards to protect us from our own worst behavioral impulses.
My goal for these blog posts is to provide useful information so that you can make more accurate decisions.
- Noise includes facts/data/news that cannot be processed into useful information (<— WHAT MOST STUFF IS)
- Useful information can be used to make more accurate decisions (<— WHAT I’M TRYING TO PROVIDE)
Since there is an endless and ever-growing amount of things to learn, I hope that these posts are helpful in summarizing important topics related to investing.
