Cooperative Capital Formation

I’m reading The Affluent Society, an economics book originally published in the late 1950s, by John Kenneth Galbraith. I’m still in the first third of the book, but so far as I can tell the idea behind it is that up until this time, economics had been built around some pretty unpleasant assumptions, like scarcity, inequality, insecurity. That those assumptions persisted well beyond their expiration date, into a new world of affluence, largely due to technological progress. In this new era, everyone’s needs can be met pretty easily, except that our thinking is still controlled by the ideas of the past.

I’m not entirely sure where he’s going with all this, but I picked up the book because I heard it offered an early criticism of the role of induced overconsumption through advertising. This is also the era in which Buckminster Fuller was writing about the techno-utopian future in which humanity is liberated from toil by our technology.

One idea that’s really stood out so far came from the chapter on inequality. He makes it out to be a fundamental aspect of the classical capitalist economic worldview. That inequality isn’t just unavoidable, but that it is also necessary. One of the explanations for why it’s necessary is the need to facilitate “capital formation” — the accumulation of surplus wealth which can then be productively re-invested to generate yet more wealth and innovation, ultimately making everything better for everybody. Lamentably, more better for some people than others, but hey it’s the only way to keep this engine running…

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Less Than Revolutionary Finance

I’ve gotten some good natured pushback on the idea of buying oneself out of corporate servitude.  The objection seems to come in two general forms.

  1. Contingency of Financial Autonomy: Deriving financial autonomy from investments in corporations whose operations are fundamentally destructive creates a morally corrosive dependency — your interests end up being aligned with theirs, because your autonomy depends on them remaining profitable.
  2. Opportunity Costs: Even if investing in corporations doesn’t actually give them financial support, there’s an opportunity cost: the same money could be used to invest in small local businesses or social enterprises.  Wouldn’t that be more powerful and potentially transformational?

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Buy Yourself Out

Advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need, to impress people we don’t like.
— Tyler Durden (Fight Club)

A couple of weeks ago I ran a workshop on retirement investing for some other co-op folks.  I’ve run this workshop before, but lately I’ve been thinking about it differently.  Turns out calling it “retirement” investing can be a turn-off when you’re talking to a bunch of mission driven people who are working on things they love, and think they’ll never want to “retire.” The word can have a connotation of hedonism or idleness.  The permanent worthless vacation.  Or just sitting around waiting to die.  “Early retirement” serves no purpose when the work you do is done primarily because you believe in it.  There’s also a sense with “retirement investing” that you can’t touch the money until you’re old.  Which is a long-ass time if you’re in your early twenties.

So I’ve started thinking about it as “autonomy investing” instead — becoming financially autonomous quickly, so that you can do the work you’re compelled to do. Without having to worry about whether your political activism will put your job at risk.  Without caring if your mission is compatible with the Nonprofit Industrial Complex and their funding metrics.  Without having to work a soul-sucking day job that leaves you too fried to spend your evenings and weekends on civic engagement and organizing. Or alternatively… without having to beg investors to pay your living expenses while you work on the early stages of your startup idea.

This is, essentially, the project of buying yourself out of corporate servitude.

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Legalizing Crowdfunded Startups

Crowdfunding, Why the SEC Bans It, Obama Wants It, and Banks Fear It.  Kickstarter would be illegal if you were making investments in a business, instead of donations to a cause.  Even so, people have raised on occasion hundreds of thousands of dollars via the site for honor-system bound innovation.  Hopefully this will be legitimized soon.

A license to lie, backdated

Investment management firms have license to lie, backdated, courtesy of the Supreme Court decision in the Janus case.  It’s hard to believe, but the court decided that ultimately, nobody could be held accountable for misleading statements made in the mutual fund’s prospectus.  All the more reason to go with Vanguard, as it is the only mutual fund company which is wholly owned by the people whose money they manage, making it in effect a large investing cooperative.

Links for the week of March 4th, 2010

If you want to follow my shared links in real time instead of as a weekly digest, head over to Delicious. You can search them there easily too.
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Empirical Investing

In my previous post I described the stock and bond markets by analogy with a casino, but you might reasonably question the validity of that analogy.  Are market returns really as unpredictable as coin flips?  The real payoff probability distributions obviously aren’t binary; what do they actually look like?

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Links for the week of February 26th, 2010

If you want to follow my shared links in real time instead of as a weekly digest, head over to Delicious. You can search them there easily too.
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An Introduction to Retirement Investing for Scientists

After spending a number of afternoons and evenings with friends and family over the last few months reviewing their retirement planning and investments, I’ve gone and done something a little bit crazy: I suggested to the GSC at Caltech that maybe I could give a talk on retirement investing to the grad student/postdoc population.  Incredibly, they thought this sounded like a good idea, and so now I’m scheduled to give a talk in a couple of weeks.  I’m going to try and write it up here in prose form first, to get it organized.  It’s gotten to be a bit long… so I’m going to break it up.

Main Points:

  1. Taking responsibility for funding your own retirement is arguably more important now than it has been for a couple of generations.  100 years ago we had much more in the way of traditional (family, community) support in old age, and the systems that we put in place after the Depression (corporate pensions demanded by organized labor, social security) show few signs of being fixed any time soon.  Generally today you do not even have the option of signing up for a “defined benefit” plan.  It’s a 401(k) or the highway.
  2. Investment returns are for all practical purposes random, unpredictable events, and because of this there’s really no such thing as an “expert investor” in the sense that most people selling their investment management services try and imply.  Nobody can reliably beat the broad markets, but you can do a perfectly good job of managing your own retirement funds if you’re willing to spend about 4 hours per year on it, say the other half of the day you spend doing your taxes.
  3. To maximize your chances of success, you must habituate yourself to spending less than you earn, making investing as automatic as possible, starting early and aggressively, and continuing throughout your entire career, regardless of what life and the markets throw at you.  Because returns are exponential and not linear, the difference between starting to save at age 23 and age 32, assuming roughly an 8% rate of return, can be on the order of a factor of two in the final value of your retirement funds.  Being comfortable living well below your apparent means makes it possible not only to save money now, but also reduces the amount of money you need in order to have “enough” in retirement, where “enough” means about 25 times your expected annual withdrawals, as you can take about 4% of your money out each year indefinitely.
  4. Maximizing the returns on your investments largely comes down to managing investment costs: how much you pay the people doing the actual investing (i.e. the mutual fund companies), and how much you pay in taxes.  The difference between paying 0.2% and 2% in fees and taxes each year might not seem huge, but over the course of 35 years of investing, it makes roughly a factor of two difference in the amount of money you end up with.
  5. The two most important tools you have in managing investment risk are diversification and asset allocation.  Diversification reduces the overall impact of many kinds of unpredictable events (high oil prices, the demise of the newspaper industry, war between India and Pakistan, collapse of the Icelandic currency… etc.) reducing the overall volatility of your portfolio.  Asset allocation (mainly the split between stocks and bonds) allows you to choose what kind of financial risk you are exposed to, and to shift it over time as you get closer to actually needing to live off your investments.  With stocks, you get the potential for future growth, at the expense of having to put up with wild fluctuations in their value.  With bonds, you get less price fluctuation and less potential for growth, but the ability to draw a reliable income stream.  With cash you get little to no price fluctuation, but essentially zero potential for real (inflation adjusted) growth.

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