"What do you think about Tesla", and other parables on finance

When I let my engineering colleagues know that I was going to pursue financial planning full-time, we had some of the most fascinating conversations.

For instance, there was the colleague who pulled me aside and, in a conspiratorial sotto voce, asked me, "So...what do you think about Tesla?"

One word: TSLA

It was a scene straight out of The Graduate.

The trouble (I attempted to explain, though I'm not sure it sunk in) is that the market is really, really good at its job of setting prices that reflect current information and future projections. Think Tesla is going to take off? Well, sure, and the market did (and does, as of this writing) too, which is why the stock price was around $200/share, up from $20 a few years prior. Could it be wrong? Well, "wrong" isn't really the right way to think about it. If things could swing one of two ways (like, say, with marijuana stocks and legalization), then the price reflects that uncertainty; the more certain an outcome becomes, the more the price will move towards the value determined by that outcome. A sort of Schrödinger's Stock Valuation, if you will.

So if the price of a stock implies there's an 80% likelihood of a certain event happening, then sure, you could bet against it, and you might get lucky. For example, you could say, "Tesla is way overvalued! Musk is going to get thrown in jail and the company's going to go bankrupt!", and short TSLA. And you could get lucky, and TSLA could go bankrupt, and you could make a lot of money. But if your investing strategy is based on luck...well, it seems like a trip to Vegas would be a lot more fun. At least there you wouldn't be under any illusions as to what you're doing -- and you could see some good shows while you're there!

Let me stop here and say: my whole point here is that the market is good at its job of pricing stocks. I'm not telling you to gamble your money in a Vegas casino, or to buy or sell Tesla. I'm just saying that the house wins in the long run, so why not run your finances that way? Build an investment policy statement, maybe with some money set aside for speculation (if you absolutely have to!). Optimize your investments so that you're not leaving money on the table. And focus on the optimal path to wealth (which, spoiler alert, doesn't involve you spending all day researching stock picks).

"We couldn't lose!"

I don't know if my Tesla friend saw the light, but I later spoke to an older engineering colleague who had clearly learned his lesson. When he learned that I was a financial advisor, he just shook his head. "I wish you'd been my advisor back in the 90's," he grimaced. "Our 401(k)'s had self-directed brokerage options, so we could day-trade our retirement funds on our breaks. It was great -- we couldn't lose!"

Warren Buffett once said "invest in what you know", so that's what my friend and his colleagues did: they traded tech stocks. Buffett also said, "Only when the tide goes out do you discover who's been swimming naked." And in 2001, the tide went out, and they were left high and dry. Many retirement dreams were crushed that day.

Do you know what Buffett also said? “Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time.The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.” And he put his money where his mouth is: he bet a million dollars that the S&P 500 would outperform a hand-selected group of hedge funds over ten years. In 2017, he won that bet.

Now, I'd argue with him about putting all of your investments in the 500 largest publicly-traded US companies and ignoring the rest of the country (much less the world!), but I'm pretty sure we'd both agree that losing your shirt in the tech bubble was entirely avoidable. (For example, large-cap value stocks did just fine, though they took a hit along with everything else after 9/11.)

So if Buffett says the thing to do is to invest in index funds -- which, by the way, is precisely what he instructed the trustee of his estate to do per his 2013 letter to shareholders -- then why don't more of us do that? Well, for one thing, we engineers like to think we're smarter than everyone else. Sadly, we're as much victims of cognitive bias as the next person, and moreover, our insistence to the contrary leaves us particularly vulnerable!

Financial advisors aren't immune, either

Of course, engineers aren't alone in occasionally making foolish decisions under the guise of logical reasoning; even financial experts aren't immune! My grandfather was a CPA (blood will out, right?) who had the "problem" of having to sell his old office's building for a profit. Of course, being a tax-savvy fellow, he knew about Section 1031 exchanges, and just couldn't bear to pay tax on the gains. My mother distinctly remembers him pacing the room throughout the process, and she recalls asking him, "Wouldn't it have been better to just to pay the taxes, rather than all these fees?" She was right, but he'd been blindsided by his own expertise, and by the time he realized that, it was too late. (The rental property he acquired in the exchange is a bit of an albatross around my family's neck to this day, but that's a story for another time.)

And speaking of my grandfather, one last story. Among his other work, he helped people with estate planning; my grandmother would complain about "all these widows" hanging about, asking him for advice after their husbands passed. So of course you'd expect his own estate plan to be airtight, right? Sadly, not so. When my grandmother passed away, he was in shock. "I was supposed to die first," he told Mom over and over. His carefully-crafted estate plan fell apart because of one wrong assumption, and she spent the next six weeks -- missing her anniversary and her birthday -- helping him put things back together.

It's like my estate planning professor says. "There are two things that must absolutely work perfectly the first time: your parachute and your estate plan. And it's for the same reason: you have one and only one shot at getting it right!"

Now, if there's one thing I like more than telling stories, it's hearing them. So: what financial parables do you have to share? Leave a comment below!

Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.