Nothing’s Free

We have all heard the saying, “There’s no such thing as a free lunch” or “Nothing is ever free”. These phrases have been instilled in us by our parents, leaders, teachers, and mentors. Another phrase that goes right alongside this is “too good to be true” and if it’s too good to be true, it’s not true. We can all remember a time when that thought has crossed our minds. You may have seen an advertisement or pitched a monetary figure that just didn’t seem right. We have these thoughts from time to time because of what we have been taught or what we have experienced. At times we've all ignored these teachings and our gut reaction seeking something extraordinary, but often obtain something less than ordinary. In Morgan Housel’s book, “The Psychology of Money'', he outlines the “nothing’s free” phrase we all know in chapter 15. Of course, this being a financial book, his outline is specifically about how we think about money, the fees associated with it, and the psychology behind it. Let’s dive in.

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Psychology: “Every Job looks easy when you’re not the one doing it”

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General Electric was the largest company in the world in 2004 – times were good, profits were high, and their dominance had no end in sight. The crash of 2008 however, sent GE’s financing division into a downward spiral. GE relied on their financing division for over half their profits and bad bets in the markets resulted in billions of dollars of losses. In 11 years (2007 – 2018), GE stock fell a little over 82%. CEO Jeff Immelt stepped down in 2017 and on his way out said this; “Every Job looks easy when you’re not the one doing it” – The Challenges faced by someone in the arena are often invisible to those in the crowd. Dealing with a spiraling company, regulators, Wall Street, investors, and the job security of his employees is not only hard to do but hard to recognize how hard it actually is until you are the one doing it. The CEO’s successor only lasted 14 months because he also learned these lessons firsthand.

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“Most things are harder in practice than they are in theory. Sometimes this is because we’re overconfident. More often it’s because we’re not good at identifying what the price of success is, which prevents us from being able to pay it”

Money: “Successful investing looks easy when you’re not the one doing it.”

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The S&P 500 increased 119-fold in the 50 years ending 2018 - All you had to do was sit back, relax, and let your money compound. Sounds pretty easy right? Well, of course, it may look easy when you are not the one doing it. Hard part about this can be explained with moments in time. We all know that over time, the markets generally go up, but thinking in moments in time, the opposite is often evaluated and is often the motivation of concern or even selling. ‍

“Successful investing has a price, but its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret.”
Familiar sayings; “Anything worthwhile has a price” or “You often get what you pay for”

This does not mean you can’t find opportunities or discounts in the markets, just as you can find deals at your local car lot, you can find these in the markets. However, the price you pay for return in the markets is volatility and if a product claims to have risk-type returns with no price attached, your gut should be signaling you that it may be too good to be true.

A few years ago, Fidelity conducted a study finding traits of the best Investors. The best Investors were either dead or forgot they had the money…

Psychology of Money: “The price of investment success is not immediately obvious”

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“The Question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns? - The price of investment success is not immediately obvious”

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If you are a family of Fiat or are familiar with wealth management, our industry is not exactly transparent when it comes to expenses and the monetary price you pay. What our industry often lacks is transparency. When you are surprised by a fee or a price for something, psychologically we interpret this as a fine. Think of it as receiving a speeding ticket or an IRS penalty - since we interpret this as a fine, we also connect it to doing something wrong. The decisions you make are supposed to deter you from getting fines so when are losing money the instinct is to stop, and stop incurring fines. As mentioned above, Morgan Housel explains the price of investment success as volatility, fear, doubt, uncertainty, and regret - This is the psychological price rather than the monetary one.

“It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the mindset that lets you stick around long enough for investing gains to work in your favor.”

At Fiat, we believe that transparency and education about fees and investing allow our families to understand how to view their investments as well as what successful investing looks like for them. Morgan Housel has another great saying, "Rational vs. Reasonable" - What makes financial sense based on math may not always make sense based on you.

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Market returns are never free and never will be. They demand a price just as any other product. That price (as explained above) is volatility. In 2019, 18 million traveled to Walt Disney World and paid on average $100/ticket, very few felt like this was a fine or punishment. The good news is, that you are not forced to go to Disney World just as you are not forced to seek market returns. If you live here in the twin cities, you can spend a day at Valley Fair, save yourself some money, and have a good time in the process. But again, you’ll usually get what you pay for. Valley Fair is good, Disney Wold is great. Same with markets, the lower cost of admission at Valley Fair is like investing in cash or bonds, Disney World is like the equity markets.

Sometimes it rains at Disney World and sometimes your market positions will go down, there is no guarantee it’s will always be sunshine, rainbows, and times of growth. But find the price you are willing to pay, find your comfortability in the market, and do not chase fiction.

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