Friday, January 4, 2013

What You Believe

“Jack (Uldrich) believes that the greatest barrier to change today is people's unwillingness to unlearn many of the things they think they know. Without an openness to unlearning, people don't even think they might need to change in the face of accelerating change.” From Imagine A Better Future by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.

Each and every one of us has certain limiting beliefs. We have been taught to believe and behave by parents, the culture, friends, and personal experience. Our brains are lazy. Rather than looking deeply into a problem we react subconsciously to stimuli just like rats trained to run a maze. This truth applies to financial matters.

Most middle class Americans believe a car payment is a fact of life. It isn’t. There is no reason you need to be saddled with a car payment. You can drive a $3,000 car for a few years until you can afford something better. A determined teenager can save $3,000 in less than a year by cutting grass in his neighborhood. If you then pay yourself the equivalent of a car payment every month for three or four years, you will have enough money to buy a $14,000 car. $14,000 will buy you a really nice car that ought to last for eight to ten years. By that time you will have enough money to pay cash for a new car if that is what you really want.

I want to find smart people who know a lot more about managing money than I know. I want to learn from them then apply what I have learned to my life and my problems. What I believe can stand in the way of accomplishing this goal. Consider, I have spent a fair amount of effort learning and applying the basic principles of value investing to building my retirement accounts. Now, to some degree, my brain is on autopilot. I maintain a conservative age appropriate balance between cash, bonds, dividend paying stocks, gold, and mutual funds. I read and believe the contents of articles, newsletters, and books written by authors who support my prejudices. I try to read material by knowledgeable people who disagree with my basic assumptions, but this is hard work. Our brains don’t like hard work. I also don’t like to admit I could be wrong. Studies indicate that great ideas arise when disparate minds come in contact with one another. Solomon observed, “As iron sharpens iron, so one person sharpens another.”

My ability to concentrate on solving a problem can limit the number of possible solutions. Consider, I am focused on finding stocks that meet certain criteria including a dividend, a low P/E ratio, and good cash flow. What if the next big thing does not meet those criteria? I will never see that opportunity unless I am actively investigating the claims of people who disagree with my assumptions. What if something unpleasant is just beyond the horizon, waiting to take down one of my investments? Could Mayor Bloomberg’s idiotic and hopefully illegal ban on the sale of sodas larger than 16 ounces by restaurants and concession stands have implications for the future of Coca Cola (KO), one of my happy stories, or will it have no more effect on the profitability of that product than cigarette taxes and age restrictions have had on the profitability of the Altria Group (MO)?

Finally, your memory is selective. You do not remember everything about a particular event. In fact we tend to drop some of the facts and replace them with imagined details. Because I have had good success using the value model for investing in individual stocks, I tend to forget the times this style did not work. I lost money on Merck & Company (MER) even though that stock met all my criteria for a good investment. I tend to believe that most technology stocks will prove to be death traps. This is based on two experiences, one a disappointing gain, Cisco Systems (CSCO) and a loss with Corning (GLW). I still love Corning technology. They have the coolest stuff. I believe their fiber optic technology is the future of high speed networks. Their third generation Gorilla Glass should be on every smart phone sold. They just don’t seem to be able to run a profitable business. Should my prejudices eliminate any future investments in technology stocks? That would be pretty stupid.

Start by picturing your desired outcome. Then begin to analyze how your assumptions limit or support your goals. Your mind, as well as my mind is filled with fiction, wishful thinking, prejudice, and propaganda. Take some time to shake up your rigid patterns of thought.

Ask the question, “What works?” If some part of your financial life is less than you want it to be, go out there and find some better ideas.

This post was inspired by an excerpt from an unpublished book: "NLP: The Essential Guide" by Tom Hoobyar, Tom Dotz, and Susan Sanders

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