Sunday, September 23, 2018

“Mind”–> How To Invest (Part 4)

Although we want to get to more subjects, we are going to pause for a second to look at the magic of a 401K plan, and the common misconceptions about how to use it.  I am then going to suggest that the American Dream of owning a house is the wrong vision for most people.  The right dream is filling up your 401K plan.

Let’s start off with the base chart from our last three posts.  The core of our future money comes from dividends because they never go away, and this guarantees the base money making machine, your S&P 500 stock fund, is never touched. 

Here is the chart of how dividends have grown over the last 100 years, adjusted for inflation.  You should expect that if you can live off of the dividends, things are only going to get better over time.


Everything other than dividend is subject to massive losses that can go on for a decade.  The glory of dividends is that they will never remove the economic base of your investment, which is the stock.  Any time you removed a stock, you lower your dividend yield.

How do you retire with the maximum dividend yield if you are banking on the S&P 500?

I’m going to take you through an example.  I am assuming that you make $100,000 or more.  I know that this is above the national average, but it is easy to use for an example, and its not that much above.  (If you are extremely poor, I am going to assume that you are not reading this post, and God’s blessing on you, and I hope you find the opportunity to get out of a hole, so you can read this post.)

The tax man is a massive drain on your investments, and you truly need to do everything you possible can to get around him.  Fortunately, the government encourages you to not pay taxes, but in very limited ways.

Now, let’s go back to our $100K salary, assuming the S&P 500 with a 2% dividend yield. 

The way that our tax code is set up is that you get taxed at a lower rate on your income up to a certain level.  On a $100K salary, your 25% tax rate starts at~ $90K.  Up to that dollar amount, you average a 14% tax rate.  On that last $10K of income, the government is going to take $2,500, or 25% of the last $10,000 you make.

The magic of the 401K is that if you divert your money into a 401K, the government does not tax it at all! 

In our case, if you place $10K into 401K, you save yourself $2,500 in taxes.  On top of this, virtually every company that  has a 401K, will match at least 50% of what you put in.  (You always want to check on employers plan before you join them.)  So, if you are at a decent place, the company puts in another $5000 to raise your savings to $15,000.

Now you really need to absorb this.  First off, you save 25% from the government on your taxes, which is $2,500.  Then on top of this, you get another $5,000.  If you took out the money, you would have only of had $7,500 ($10,000 less the 25% tax rate).  The effective difference is that you sacrificed $7,500 today to have $15,000 for tomorrow. 

I want to emphasize that getting free money from your employer is absolutely amazing, and you should always contribute up to the maximum match.  However, I work with very highly paid people, and I often hear that they are contributing just up to the “free money.”  Many people I work with make enough money to be in a higher tax bracket than 25%, but somehow they don’t understand that not being taxed is an incredible help in their wealth.

So, let’s compare investing in and out of a 401K plan.  Without a 401K plan, you would only have $7,500 to invest.  An easy way of investing in the S&P 500 is to buy SPY, which is an ETF proxy for the S&P 500, which is another blog posts, and it pays you your dividend once a quarter.  You then say to yourself, “well I might as well reinvest the dividend because this is my retirement fund.

This reinvestment of the dividend turns out to be incredibly important for your wealth building. 

Remember than the stock market goes up and down but pays 2% dividend every year?  If you reinvest your dividend, you can use it to buy more stock.  This in turn, increases your shares, so you get a bigger dividend check that you reinvest the next years.  This is true regardless of the stock price.

  • Year 1:  100 shares of SPY & you get a 2% dividend, which you use to buy more SPY
  • Year 2:  102 shares of SPY & you get s 2% dividend, which you use to buy more SPY
  • Year 3:  104.4 shares of SPY & you get a 2% dividend, which you use to buy more SPY

This is the power of compounding.  No matter what happens, you are getting more shares for the day that you retire.  Because you know the base will grow at least the same as inflation over a long time, you are growing your eventual dividend payout at least 2% per year.

What is nice, is that this is so well know that there are two ticker that you can use on Yahoo finance to see the difference between S&P 500 with reinvested dividends versus S&P 500 without reinvested dividends.

^GSPC is the tracker for just the price of the S&P 500

^SP500TR is the tracker for S&P total return, with reinvested dividends.

If you have 1 share of SPY 20 years ago, and you were retiring today, here is the difference between reinvested and not reinvested.


Reinvesting the dividends almost doubles your income at the end. 

2.9x return over 20 year

1.7x return if you don’t reinvest your dividends

70% higher payout by reinvesting.

The example above is in the theoretical world without taxes.  In the real world, the government says, “You made money, so I’m going to take 16% of that dividend that you made.”  This means that you’re compounding effect goes down 16%.  In short, this means that your dividend payments in the future will be 16% lower.  It is truly a killer.  (SPY is both qualified and unqualified dividends, which is another post so I’ve pushed up from the 15% that you might see on a tax website.)

But remember you have a 401K for your dividends!  Not only does your money go into a 401K tax free, but it also grows tax free.  Remember, that you also start off with a lot more money (25%) because you don’t get tax on the amount that goes in initially.

Between these two factors, if you decided that you “didn’t want to use the 401K,” at the end of 20 years, your payout would be approximately 25% less than by using the 401K plan.  Or, if you want to look at it from the base of “how much more do I get by using a 401K?”, it means your payouts will go up 33%.  This is a lot of money.

So, lets say you have $1M in your 401K plan.

What!  How realistic is this type of a number? Can we really get $1M in our account?  You can, and let me show you how.

This things first, we don’t want to say “$1M” in the future because we know that inflation will cause $1M to look a lot smaller in the future.   Therefore, we want to adjust for inflation.  There are a variety of calculators that can help you figure 401K growth.  The way to “bake in” the inflation factor is to say, “I’m just going to calculate a growth rate of 2%, which I know if going to come from my dividends.”  We know the base on dividends will stay up with inflation, therefore, just lowering the growth rate to 2%, bakes in the effect of inflation.  In reality, the number will be much, much bigger, but don’t worry about this.

I’m also going to assume that you have a good employer that matches your 401K 50% to the first 6%, which is pretty standard.

The math is pretty simple.  You assume you average $100K per year, you invest 10% of your salary, and you assume the dividend increase your base by 2%.  At 60, you will have $800K.  Although I don’t show it, if you wait until you are 65, you will have $1M.


Then remember this was down adjusted so that this is $1M in today’s dollars.  Does the evidence say this is happening?  It turns out that 3% of Fidelity 401K held by people that are 50-59 years old have $1M.  So, is it hard?  Sure.

Is it possible?  Sure.  It is very possible.  There is a subset of people called “Financial Indepent/Retire Early” or F.I.R.E.  This culture is sacrificing today to be able to retire early or be completely independent. It is amazing to me how these people, often not making big salaries, are well on their way of doing the above.

Also, from my experience is that most people have no idea of the benefits, and they are too lazy to do the work to enroll.  This is not just conjecture.  The research shows that only 56% of employees 25-34 will enroll in a 401K program, if they have to do work.  Thank goodness people are lazy the other way also.  So, company’s have been auto enrolling their employees of late, and it turns out that if people need to do work to get out of a 401K plan, the 56% will jump to 92% because only 8% will do the work to unenroll from a 401K program.  Now I used the word lazy, but in reality, most people just go on auto pilot and don’t want to think that hard about their future, and once they are enrolled, they just adjust their spending to what they have.

The bad thing about auto-enrollment is that it normally enrolls at a low rate of contribution.  In reality, you should jump in as hard as you can, even if it means sacrificing many other things.

As I wrote before, my goal is to live off of my dividends, so I can pass my wealth to my kids, who I am hoping will train all the following generations.  Most of the FIRE community are not looking at it this way, so they plan on being able to withdraw 4% or so, which is higher than the 2% dividend rate I keep talking about. 

On $1M, 4% is $40,000 per year, which is very healthy.

Now, you get to add social security to this number.  In our example, we picked somebody making $100K per year, which is higher than the average household income of $75K, for everybody with a college degree.  However, lets just use the average social security payment of $17,000 per year, because if you made $100K, you’d even have a higher retirement.  (By the way, even if social security goes “bankrupt” the SS payments should only drop 25%, or down to roughly $13K.)

So, now you are living on $57K per year, and where do you want to live?

If it were me, I would move to either Port Orchard or Gig Harbor Washington, because the golf is cheap, and it is close to Seattle if I want to go to the city with my wife.  These are medium cost areas, because you would need to sped something like $2K per month for a 3 bedroom house with a nice view. But remember that

Now, you have $2,750 to do everything else, which turns out to be $900 dollars per day.  I don’t see any problems on living on $900 per day.  In reality, I should be able to not only live on this with my wife, but then even be able to put money away for a rainy day, travel or anything else I need to pay.

Rent, you say, why would I want to rent?  Why wouldn’t I want to own a house, and have even more money?

I plan to show this in a future post, but let me give you an example right here.  I just looked up a rental on Zillow, and they want $2K per month for a charming house close in downtown Gig Harbor, a tourist spot.  Let’s say that I wanted to buy the house “because I don’t want to pay the rent.”

Zillow says the house could be bought for around $840K.  Most people don’t think about the tax man.  In this case, property tax is going to be about $500 per month.  Put insurance on top of this, and you are paying $650 per month to live in a “free” bought for home.  Now, lets say the roof goes.  Do you want to pay for this?  The water heater goes.  Do you want to pay for this?  

This idea that things break down is very common, and landlord have something they call the 1% rule.  You put 1% of the purchase price of the home every year because you know something is going to be replaced.  So, let’s put the additional 1% or $8,400 per year for things that break.  This is an astounding $700 per month.  Add this to your other costs, and owning a house will cost you $1350 per month.

You always need to say “what is the difference” between two scenarios.  Yes, you are paying more by renting, but it is only $650 more, adding all the possible expenses including eventual repairs.  The point is that instead of buying a house, you could have been putting all this money into your 401K plan.

As we just pointed out, owning the house saves you $650/month or $8K per year.  If you have the 401K account, you can pull out $34K per year at a 4% withdrawal.  You are net positive $26K per year, or you have over $2000 more to spend per month by favoring the 401K plan. 

This should make sense if you think about it.

It actually turns out that in most areas, the cost of renting a house goes up the same as inflation.  On the other hand, even thought we’ve talked about withdrawing between 2% to 4% on your 401K plan, the base stock go up faster than inflation.  By renting and saving the difference, you end up having a ton more money in the future in most circumstances.

Let me be clear, and I know this is so counter to what you’ve been taught and feel.

Unless extraordinary circumstances exist, you should NEVER buy a house if it means you are taking away money from your 401K plan.  Now, if you have fully paid up your 401K plan, and now you have money left over, be my guest.  It’s not that owning a house is bad, but if it causes you to miss out on filling up your 401K, it would be horrible.

By the way, the government is not stupid, and the taxman or taxwoman is going to get their due.  They don’t want you hiding all of your money in your 401K plan, and generating tax free income.  They actually want to force you to pull the money out of this fund, so they can get at it.  Therefore, they have a requirement that once you get to 70 years of age, you need to start pulling out  around 4% of your money.  If the dividends are only 2%, and the government forces you to pull out 4%, they are going to get to an additional 2% of your capital.

A way of working this, and I’m assuming that you are an experience investor, is that you may want to raise your percentage of higher paying dividend stocks in your portfolio.  Let’s say you are getting to 70 years of age, and you know they are going to start to force you to empty out your 401K.  You may elect to move your portfolio to a set of stocks that produce 4% on the dividend.  This means that you’ll continue to only pull out dividend income, and the principle will stay untouched. 

However, to do this you need to make sure that your funds are in a place where you can manipulate them.  Most companies have 401K plans that are set up so that the employees cannot hurt themselves.  However, it also removes a ton of control.  If you want to really be able to dial in your investments, then you will want to move from a 401K at a T Rowe Price or Fidelity to something like an eTrade self guided IRA.

The only thing you need to remember is that the easiest time to do this is when you either switch employers, quit or retire. 

We have a bunch of subjects to cover.  I want to emphasize that as down as I am on buying a house, there are a couple of unique situations that you should know about.  We will get to these in future posts, and what started off as a simply series, is turning into a lot of work.  However, I hope that you enjoy our journey.

“Mind”–> How To Invest (Part 3)


We left our last post stating we were going to look at the Warren Buffet method to determine if the market was overvalued, but before we get to this, I want to cover general market health and now to perceive the problems we had in 2008.  I want to cover this because it was a life changing event, and there are no clear answers other than we dodged a bullet in 2008.

Look at the S&P 500 earnings chart above, which we have shown before.  This is in inflation adjusted dollars. When companies make money, they also spend money and they employ people.  Life is good when earnings are going up.  A flat time of earnings (like the late 70s to 80s) is a bad time for everybody.

You can also see why the 2008 economic event was terms as “on par with the great depression.”  You can see that earnings just dropped like a rock.  The 2008 crash involved real estate going south. This impacted private investors that were trying to buy houses.  This impacted home owners, who thought they had made a ton of money off of their homes,  This impacted all the banks that were selling derivatives and credit swaps.  So, when the bottom fell out of the housing market, the economy stopped buying.  So people like Ford and GM had sales fall off, this means they let go of people, which means their employees stopped buying.  It was horrible because economy was stopping, and a chain reaction of stopping was happening.  It was like a pile up of cars on the freeway.  Although just two cars had an accident, everybody else on the economic freeway was in trouble.  The problem with this freeway is that once cars (business stop), you can’t get them going again.  The cars stalls out permanently (bankruptcy).

Through massive intervention by the government, we bailed out the auto makers, bought real estate assets, and propped up banks.  We were able to get the stalled cars moving again, and what is so amazing is that it only took about three years to get the market back to record earnings.  While nothing is ever guaranteed, I’m doubting we’d see another depression era event happen in the next 10 years.  However, we gather a ton of debt for our government, and this could put us into a new scenario than we have ever been before.  I am, for the rest of these posts, going to say that I don’t think that we will see another event like this in the next 50 years.  I personally will investigate and think about this in the future, but I want you to know this is not a place where I have clarity.

So, now back to “is the market overvalued?”

My hero Buffet has another way of looking at market valuation, which calls the most important factor he knows.  He says that we should look at the total output from our country, and compare it to the value of the stock market.  If the stock market is >150% of the GDP (gross domestic product), then the market is vastly overvalued. The people at Gurufocus have shown these numbers below.


A good proxy for the overall market cap is the Wilshire Total market fund, which has 5000 stocks or more than 10x of the S&P 500.  If you take the market cap (total dollars of all the stocks added up), and plot it over the GDP line, you can compare the two amounts and get the ratio Buffet talks about.

If you look at the market from this viewpoint, in the early 2000s, the market cap got to 150% of GDP.   Just like we were in 2002, we are again at 150% of the GDP in 2018.  So, we would have said the market in 2002 would come down (and it did), and we would expect the market in 2018 to come down (but it hasn’t).

What is the GDP?  This is a blog post in itself, but basically the GDP is the best way of indicating how much activity is going on in an economy.  If your GDP is going up strongly, life is getting better and better at a whole inside of your economy.  By the way, the common wisdom is that growth at all cost can be bad.  The economy, like a car, can only accelerate so fast.  It is thought that our economy should grow at 2-3% per year so that we don’t hurt the overall system.

The logic is that growing economy will have strong businesses, and you can’t have strong businesses without a strong economy.  The two are incredibly strong corelated over the long term.  The problem is the short term. So, the stocks will wiggle around the GDP line.  If it is under the line, you should expect that sooner or later it is going to catch up to the line.  If it is over the line, sooner or later, it is going to come back down to the line.

Do you remember the last “hypergrowth” phase from 1980 to 2000 in the first post? 

If you remember this, now look at the chart above.  You can see that the market was under the GDP line, so we would expect it to go up faster than the line.  The economy was buzzing along, and the stock market, which should echo the economy, took through 2000 to catch up.  Then it had too much momentum, and zoomed past.

I think that any rational investor with a strong background in the fundamentals will agree with what I’ve written so far.  The biggest question is that we are over valued and “how do we get this back into line?” The problem is the higher the gap, the bigger the fall.  All the big brains on Wall Street respect and have read Buffet.  Now, some guys are very self deceptive and ignore him, but the smart money doesn’t.  This is no secret.

The question that everybody is wondering is how it will correct.  This is why you’ll listen to different people and they all have different ideas, because nobody knows.

In the best of all worlds, the market simply flattens out.  If the market goes flat, the GDP will catch it.  This is the best way.  The best thing about this scenario is that it simply won’t have any impact on you other than if you want to retire right now, you’ll find that your stock market isn’t going up, and your dividends are not increasing.  So, remember when we discussed the “safe withdrawal rate” being between 3-4% per year.  If you were retiring right now, I would strong suggest that you should be planning on 3% and not on 4%.  However, because there is no crash, you won’t see your principle slip away.

In the worst of all world, the stock market will correct with a piece of really bad news, which will bring the stock value back to the line (or under the line) in less than a year.  This correction is absolutely horrifying because you find out that your nest egg is worth 30 or 40% less than what you thought.  So, if there is anything that takes forces you to take more money than the dividends out of your investment, you are taking away from the principle. 

I fear that the second way is more probable.  The problem with the system today is that there is a ton of computerized trading programs.  They are waiting for another sign, and the market will go down.  It is hard to understand what to do when the market is in change, and I would not suggest that you or I can time this.

Thus the question to me is not “if” this will happen, but “when” it will happen and how it will happen. 

What is the best way to deal with this risk?  Can I pick certain companies that will do better?

Here is a great square pie chart from CNBC in August. This shows you the market capitalization of the entire market.  All of these numbers go into the S&P 500 to come up with the value of the overall S&P 500 market.  The size of the square, shows you the impact or the business on the total.

If the market changes, everybody could take a hit.  Or there are companies like Amazon that make no money at all, but are worth 4% of the overall market.  If Amazon had a normal PE, the market would lose almost 4% overnight.  (But, as a benefit, when you own the S&P 500, when Amazon doubled in the last year, your stock increase by 2% by Amazon alone!)  On the flip side of this, if Amazon started to pay a 2% dividend on their stock price, you’d see the S&P 500 dividend yield go from the 1.8% today to 1.9% with our proposed Amazon dividend included.  (Basically, your $50 yearly S&P 500 dividend check from the last post would go up to $52.)


Maybe you think you can pick the big guys, because “they look safe.”

You can see that Amazon, Apple, Microsoft and Google are all about 3-4% of the S&P 500 market cap.  If we go back to 1990, IBM was roughly 4% of the market cap of the entire S&P 500.  The other big players were Exxon, GE, and Philip-Morris.  IBM is just a sliver of the market today.  Exxon merged with Mobile, but is still a much smaller piece than their history.  GE self-imploded, and Philip-Morris/Altria had the problem of causing cancer, and I just could never support as a stock buy regardless of return.  However, it also has done poorly.

If you were smart enough to hang onto the best two performers (Exxon and IBM), the S&P 500 is still worth more today.

The reason that I bring this up is not to get too attached to your stocks, and you probably can’t figure out how to time the market so you only have the strong stocks in your portfolio.  The market is too big and too crazy for you to understand what is going to happen.  By not trying to be smart, but by buying the market, which basically the S&P 500 is a proxy for the entire market, you have the easiest way of continuing to cover your bases and build for the future.  It also speaks to the winners of today, can fall from grace and not be a good investment tomorrow.

Can I pick stocks better than the S&P 500?

No.  You can’t.  Seriously.  Stop thinking that you can.  Stop now.

There is only one guy in the world that has a track record over an extended period of time of being able to pick stocks better than the market.  That is Warren Buffett.  The problem is that Buffet is old, and it is not clear to me if his successors will have the magic.  There has been no fund over the last 30 years, other than Buffet’s firm, that has done better than the S&P 500.

Okay, maybe there is one way, but you need to be careful.

I do believe you may want to venture outside of just the S&P 500, but you should invest in an industry that you know extremely well.  For me, this is investing in storage technology because I work in storage technology.  Now, let me be clear upfront.  Some people take knowledge that they gain from being an “insider” in a company and trade on this knowledge.  This is strictly illegal because the government knows that this is an unfair advantage.  What I am talking about is trading on knowledge that is publicly available, but will make more sense  because you are in the industry.

However, you need to know that what is obvious to you, even with public data, may be clueless to somebody outside the industry, even in the face of overwhelming data.  Why does this matter?

Because only half of the battle is knowing what is going to happen.  The other half of the battle is knowing how the other investors will react, and it has taken me 20 years to understand the later.

Let me give you an example.  In July of 2011, Thailand start to experience flooding.  Thailand was the key manufacturing hard drive site for Western Digital (WDC).  It became common knowledge that WD had a real problem.  This did cause the price of their biggest competitor, Seagate, stock to surge.  It jump up around 50% after Seagate and WD announced their earning for C3Q11.  WD revenue took a hit, and they told the street that they had an issue.

Now hard drives were incredibly important to building a computer, and incredibly complex.  If you can’t get a hard drive, you can’t build anything.  Because I was in the industry, I was just waiting for the price of Seagate to explode even higher than 50% because I knew everybody would go after their hard drives. 

The earnings were announce.  WD was going to be in serious trouble, and it was obvious that this could stretch out quarters because their factories were under water.  So you had an industry that was going to be short for an extended period.  This means prices would go up.  It was just so obvious to me.

And the market just didn’t react.  I remember just being shocked.  The major competition for Seagate was down, and why weren’t people buying their stock?  I remember thinking “somebody knows something that I don’t.  There is no way that this stock can’t skyrocket.  I must not understand anything at all.”


But this wasn’t the case at all.  The real issue is that I could see what was happening, and nobody else was paying attention with the same data.  As you can see in the chart above, the impact of the flood was a help for the entire next year because the market was tight.  At the same time, Seagate doubled its dividend with all the money coming in. 

What happened was momentum.  Even though the industry had changed due to a massive event, the “reality of the change took a year to happen.”  The thing to remember, even if you are an expert in a field, and you know what is going to happen to a stock, it take a while for the market to catch-up.

In this case, I was an expert in the field, and I knew exactly what was going on.  However, I could know what was happening, but I didn’t realize that the market wouldn’t believe it until it had seen multiple quarters of performance to prove the point. 

What did I do?  I read my employee agreement, and it said that I could invest a limited amount of my funds in the industry, even if that meant a competitor.  So, I invested  in the industry, and it turned out just great.  Only I thought it would turn out immediately, and it took a year to come about.

I remember my Dad would say that he was horrible in investing in the market, except for his own company Boeing.  He never did anything illegal, and never was an insider trader.  But he could see the trends for the next year because he was in the industry.  You should take advantage of your knowledge.

The point is that the stock market is a great big massive machine that chews up the smartest of the smart.  You can be a guy with a 200 IQ writing programs to see trends, or you can have the data right in front of your face (like me), and the stock market may do something completely different in the short run.

So, at the 50,000 foot level there are some things that you should:

1. Generally invest in the S&P 500

2. Understand that the only safe withdrawal rate is going to be the current amount of dividends, but if you don’t want to pass on generational wealth, you can probably pull 3-4% out of your funds without any issues.

3. Understand that there are phases to the S&P 500, and use both the PE and Total Market Cap to understand what your risks are (and the risks are pretty high right now, but don’t be surprised if it even goes higher, and get more risky).  Right now we are at historical highs for total stock market to economic output, so you should be very careful if you retire today.  However there is no timing or method for how this will correct.

4. Finally, you may find a rare circumstance that you really know what is going on because you work in an industry.  Now, you can’t trade on insider information, without being thrown in jail, but if you work in an area, you probably can understand that area and make some smart investments.  However, don’t be surprised if the market is way behind you.  If you are confident in your own knowledge, and willing to wait, you can make some good returns by using your expertise.  Just make sure that it is public knowledge, or you risk severe penalties

If you have read these 3 blog posts, consider yourself in having an okay knowledge of the market.  At least you will be able to deal with investment advice much better than most people.  However, you may want to go to the next level.  There are a few more things we will touch on in future posts:

a. When do I want to have some cash because of sequence of return risk?

b. How does this idea impact other investments or retirement?  And why is the Vanguard and most other managed program wrong? (Equity glidepaths.)

c. How do I invest in real estate as a buffer?  And what value is my home?

Should be a fun series of events.

“Mind”–> How To Invest (Part 2)


In our last post, we stopped with this graph.  This shows you the PE of the S&P 500, which is the top 500 companies all rolled into one number, so you can regard the overall market as one number.  You can see that up until 1998, if the S&P 500 got above 20 it was very rare, and the market didn’t stay above 20 for long.

However, over the last 20 years, something has been seriously changing in the marketplace since 1998.  To repeat, the S&P 500 is at historic low yield for dividends, and the stock prices are at extreme highs compare to their earnings. 

The first thing we need to discuss is where do we get the earning from in the Price to Earnings ratio?

Well this is tricky, because there are two ways.  You can look at historical earnings, which is the chart above, or you can look at your best guess for future earnings.  Remember that even though the dividend has been very poor for the last 20 years as a percentage of the stock price, the actual dividend (in inflation adjusted dollars) has been going up strongly.  So, if a stock has a poor dividend yield, how does the dividend go up so nicely?

What has happened is that we have had an explosion of earnings.  This means that while you buy a stock with a low yield on the dividend, the next year, the dividend is raised dramatically.

Let me give you an example of how this might work.

Year 1:  You buy the stock

· You have a $100 stock

· Last years earnings was $5 (20:1 PE)

· You got a $2 dividend for the year or 2%

Year 2:  You hold the stock

· The stock increase price to $200

· Last years earnings was $10 (20:10 PE)

· You got a $4 dividend for a share of stock that you bought last year at $100, or 4% dividend

So, you may have bought a bad dividend in the first year, but the second year the dividends went up so strongly, you end up with a great yield.  You feel pretty smart.

So, let’s just graph out the earnings in inflation adjusted dollars, to see if they should be able to support higher dividends.


So you can see from the above chart that the reason that the PE is so high is because the earnings have been increasing so much.  Just like in the example we just looked at, we have investors buying in, even when it doesn’t look all that great, because they believe that the earnings are going up pretty dramatically.  However, we are going to post the actual dividends right below, so you can see both charts at once.


So the earnings have gone up over the last 5-6 years, but the dividends just went crazy.  We probably should conclude that it won’t be easy to keep raising dividends like they have over the last 5 years.So the reason the stock market is increasing is because they believe profits have a path to grow.

A savvy investor knows that you are always willing to take a poor initial dividend yield if you think the dividend is going up.  Although this example is an extreme one, generally this is what is happening.  Because people know this, they create “forward PE ratios.”  The forward PE is considered to be around 17. 

The problem is that forward PE ratios in any Bull market are always reasonable.  Everybody thinks earnings are just going to continue to increase.  This is why everybody is not more concerned about the stock market.  Look at the chart in 2007.  The market thought that the forward PE was around 15, or even better than today.  The problem is that the future earnings weren’t real.  When this became obvious, the market cratered.

Therefore, there is the old saying, “The trend is your friend until the end.”  In other words, this is a great trend, but nobody can tell you when it is going to end.

However, our Warren Buffet does have ideas on this, which we’ll explore in our next post.

“Mind”–> How To Invest (Part 1)

Let me give you the fundamentals of investing.  Most of the information that people hear is fine, but it misses the big picture.  I hope by the time you are done with my blog posts, you’ll be able to put any investment advice into context.

Rule 1:  Invest in the S&P 500

Warren Buffet, the world’s smartest investor, makes this his number one statement.  He says the common investor should invest in a low cost S&P 500 fund, and stay away from the money managers.  In 2017, he won a 10 year bet with professional hedge fund managers, where he said he believed an investment in the S&P 500 would out perform competitive hedge funds.  He won going away.

By the way, being able to invest in the S&P 500 was not easy until recently.  The hero that rescued us from this morass was a guy named John Bogle.  He made a low load fund, and after 40 years, many people are catching on.  This is bad news for the fund managers that would like to take your money, but good for everybody else.

Rule 2:  Look at everything after inflation

Inflation is like the rats that steal you grain in the middle of the night.  Inflation is your boat taking on water. There is nothing more destructive than the gentle flow of inflation that can carve a grand canyon into your financial situation.  However, most people simply don’t recognize that inflation can be used to your advantage.

Rule 3:  Understand the S&P 500 at a 50,000 foot level

It is very common for people that understand the power of the S&P 500 to shortcut and say, “You know, the S&P 500 has averaged 7-8% growth over inflation.  But let’s take a look at a chart of the S&P 500.  (I will be taking charts from this site (, who uses Robert Schiller’s work to create a “what-if” S&P 500 to go back in time.)

So the first thing that should should notice is that the S&P 500 has some real flat spots.  Lets look at the last 20 years.  You could have invested $100 in the S&P 500 in 1998, and, in 2008, you would have made exactly zero appreciation in 10 years!  Hardly sounds like 7 to 8% on your money.


And the chart above is very deceptive, and the situation is far worse.

Remember rule #2?  We need to show this chart adjusted for inflation, which is below.  You can see that we have some very long flat spots, with the gap in the last cycle actually being 14 years!    The most important thing to see in the chart below is that the market has hypergrowth spurts.  If you don’t catch one of these waves, you are going to be very unhappy.  It we fast forward to today, we may be in a hypergrowth spurt, or one bad piece of news will cause the market to crater, and we’ll have a 25 year flat spot like the last cycle.  I tell everybody I know, “the market may have another 2-3 years of growth, or we may crater tomorrow.”  They always want an answer, but in reality, nobody knows.


So, how do we deal with this?  This simply looks too random.

The answer is simple, you don’t live off of the market appreciating more, you live off of dividends.  Below is a chart of the dividend that got paid from owning an equivalent share of the S&P 500, inflation adjusted.  While we have some pretty strong swings before 1950, notice that after this time, the swings are something that anybody should be able to work with.


Let’s say that you retired in 2002, and you decided to just live off your dividends.  This was one of the worse ever because the market was at a peak, and would only recover in 2016.  During this exact same time, even though the market was only going down, your dividend income would have gone from $22 per share up to $40 dollars per share.  The market has gone nowhere, but your ability to spend money has gone dramatically up.

The problem is “well how much money would I have needed in 2002 to retire?”  This is answered by the chart below.  In any year, you can look at the “yield number” and use this to determine what you dividend income would be from any given investment.


In 2002, the yield was almost exactly equal to what we have today, or 1.8%.

Once you have this as a ratio, you are bomb proof. The problem with this number is that it is very low.  If you save $100,000, this is $1800 per year or $150 per month.  However, over the next 10 years, that $150 per month would have turned into $300 per month, because the dividends increased.

According to Fidelity, the average 60-69 has about $170K in their 401K account.  This means that they should be able to immediately withdraw $255 per month, and they will never touch their principle.  More than this, sooner or later the S&P 500 will go up, and dividends always go up (but may stay flattish for 30 years), so life would only get better.

By the way, Fidelity reports that 3% of Baby Boomers get $1M into their 401K account.  This means that they could pull out roughly $18K per year, or $1500 per month.

Personally, my goal is to live off my dividends, and be able to pass my wealth to my kids, which I hope they will learn my lesson, and pass it onto their kids.  If each generation did this, and had two kids, each child would get half of their parents accumulated base.  Then if they marry, this will mean that they would get another 50% from their spouse.

Now let’s us say you don’t have kids, or you believe it is impossible to pass down wealth and have it stick.  Therefore, you really don’t want to limit yourself to the 1.7% dividend rate, but pull more.  So, you plan to live as much as you can off of dividends, and pull out some of the principle so you can live off of this.

The most famous study on this is call called the Trinity Study, and it is used over and over for retirement planning.  We can’t predict what will take you to zero at death, because we don’t ever know how and when you will die.  However, we can look at history and ask ourselves how much could you have withdrawn in inflation adjusted dollars from a lump sum in the S&P 500 and not go to zero during recorded history.

The rule is simple: 4% should last 30 years.  3% will last forever.

Now, you may needs to put in some bonds, but this is the general rule of thumb.  I would suggest that you may want to do a triple fund portfolio, but this is just icing on the cake.

When you invest, classically you will buy a fund.

My work offers a 401K plan, and you can elect where to put your money.  My co-workers never look at the gross expense, or better termed the management fee for running the fund, and most of them have not absorbed that the S&P 500 is better than virtually any fund.

Half of our election choices are built on “target retirement date” accounts, which charge more to actively manage your future.  Sounds good, right?

The target accounts charge .08% of a percentage point to manage the funds.  The S&P 500 fund charges .015%.

“Both of these are so low, why do you care?” you might ask.  Won’t the actively managed fund do better?

Over the last 10 years, the Vanguard Targeted 2035 account would have grown $10,000 to $20,000.  The S&P 500 account would have grown the same amount to $40,000.  Now, let’s look at the Vanguard managed account.  It grew $10K, but inflation would have eaten up $2K of this.

So managed account:  $8K increase after inflation

S&P 500 account:  $28K increase after inflation

The S&P 500 would have returned 3.5 times the return!

Now, remember that the managed fund “only” charged you a management fee of .08%?  This basically works out to them charging you $80 over the last 10 years to under perform the S&P 500!  Sure, the $80 was cheap, if it actually generated any wealth.  It doesn’t.

So, lets do some recap as we bring this post to a close:

1. The market is going just great, and the most straightforward investment is the S&P 500

2. It looks like we still may have some time on our hypergrowth phase from our charts

3. We know that dividends normally never get cancelled

So full speed ahead?

The fly in the ointment is the current state of the stock market as a general whole.  One thing you probably already know is the “Price to Earnings” ratio or PE.  Remember than dividends always get paid out of earnings, and really the only time that they are cancelled or lowered is when the company can’t make money.

If you remember, if you buy a share of stock today, the yield in dividends is at historic lows.  If dividend gets paid out of earnings, that must mean that the stock price to the actual earnings is very, very high.  If we look at the S&P 500 Ratio for the last century, the PE ratio is well above anything that existed previous to 1998.

So, we want to buy the S&P 500 and we want to live off of dividends.  The problem is that the dividend yield is extremely low right now, because the price of the stock is very high.  These companies aren’t making enough money to pay a healthy dividend.

As a matter of fact, something seem to break around 1998, and the PE ratios seem to make no sense.

What happened?  We’ll look at this in our next post.


Saturday, August 25, 2018

“Giving”–> Mind and Spirit

Image result for tribute coin romanI have such misgivings about this post, and I’ve touched on it before.  However, while thinking about my life, it struck me that there was one phenomenal change in my life that I don’t talk about much, but I probably should.

If I have done my research, the coin to the left is a Roman tribute coin and was used to pay taxes.  This type of coin was probably the coin that Christ used to tell Peter than he should pay taxes to to Caesar.  The answer is yes, you needed to pay taxes.  He basically says that because you are a citizen of a state, and you use their services, you are obliged to play by the rules of that society.

There is another type of tax that we also need to pay, but unlike the governmental tax, we often don’t understand this as Christian.  We are Christians and we live in a Christian society.  We are obliged to pay into this society.  The kicker here is that the Lord calls out some effects of this payment.

“Bring the whole tithe into the store house, that there may be food in my house.  Test me in this,” says the LORD Almighty, “and see if I will not throw open the floodgates of heaven and pour out so much blessing that you will not have room enough for it.  I will prevent pests from devouring your crops, and the vines in your fields will not cast their fruit,” says the LORD Almighty.  “The all the nations will call you blessed”

Malichi 3:10-12

“Wait a minutes,” you’ll say.  “Are you trying to get me to send all of my money to a preacher?”

The answer is no, I am not trying to get your to send all of your money to a preacher.  What I am trying to do is say that you can’t get around this verse in the Bible.

I was reflecting on my life recently as I was talking to my oldest son.  He currently has a  9 month internship at Apple.  It turns out that Apple does four things:

  1. They offer a pretty decent base hourly rate to interns
  2. They pay 1.5 x base on over time
  3. They work their interns hard, with hours often close to 20 overtime hours a week
  4. They pay for their intern’s housing in the area, even if they live at home

Net-net:  My son has made a very tidy sum of money while working this job.  Now my son has not given any tithes on this.  To be clear, he is not hording anything.  He simply is working so hard that he doesn’t even know how much money he even has.  So, as the Dad, I’ve taken over and I’ve been investing this money in stocks and other financial vehicles.  However, I knew that he should be tithing.  So, I told him he needed to get around to getting the tithe out.  He is fully supportive, and has been looking at where he should invest his tithe.   He is strongly leaning that he contributes where he has been going to church for the time that he had his internship.  Generally, this is a good idea.

However, this got me thinking about my own life.  We are supposed to tithe.  I believe the Bible says that we tithe on our increase.  If the government takes 50% of your money, you tithe on the 50% that you have left.  As part of the tithing tradition, we are supposes to tithe the first fruit.  This one is especially hard.  What it says is that you pay God before you pay yourself.

My wife and I have always tried to tithe.  I remember that we were a bit more spotty when we were young, but generally we were in the ballpark.  However, when we were in SoCal about 13 years ago, some stock had gotten to a rather large value, and I had decided to cash my stock out.  At the time, it was a large piece of money for us.

I won’t say that I spent a ton of time on it, but I did make a very critical decision.  I decided that the Lord was calling me to tithe 10% gross amount.  Part of this is that I thought that perhaps there were some years where we were a little light, so I decided that I was going to make sure we weren’t in any “tithe debt” where we owned the Lord some tithes.

I consider this a turn point in my life, because we started to accumulate wealth beyond my expectations.  I won’t tell you that I won the lottery, and I am a billionaire.  However, the money somehow just got bigger.  Now, I have always been pretty money savvy, and I won’t say that I didn’t do my part to manage my wealth.  My issue is that it just came a whole lot easier than I ever expected.  Somehow, we just seemed to make the right investment choices.

Now, I do not want to boast, and I certainly am not looking to brag, but this enabled us to basically tithe much, much closer to my gross income.  What is interesting is that my life pretty much is a proof point for the verse in this post.  As much as I did my work, I am very happy to say that the Lord did far more than what I was thinking would be my natural state.


Now the issue with tithing is that it is much more nuanced than what you imagine.  The issue is that most of the Bible describes the general state of being.  Generally, as a Christian, if you tithe you will be physically well.  If you don’t tithe, you will be in a physically tough situation.  To illustrate this idea, I am showing the grid above.  The natural state for a Christian is on the dashed line.  As you move from paying your tithe to not paying your tithe, I believe that over the long run, you will tend to be physically (and even spiritually) better off.

We clearly see exceptions to this trend.  I these corners of the grid I call “Time of Job” and “Temptation.”
You can be doing everything right.  Unfortunately, we can find that even the best of all people, who whatever reason, can be thrown into a time of testing.  The entire book of Job describes this situation.  Here we had a righteous man doing everything right, and the LORD determined that it was in his best interest to be tempted and lose everything that he had.

Job complained about this, and fought all of his friends that insisted that the general line above must be wrong.  Job knew this was not the case, and he hung onto the fact that he had been faithful.  After a giant debate over this, the Lord answers Job and his friends.  He never tries and explains why he allowed all the suffering that Job experienced to transpire.  He simply says that “You don’t understand what I’m doing.”
This is the final answer, and part of the Christian faith is understanding that God does not need to justify himself.  This is a bitter pill for most people to swallow, and they want God to say why something bad happened  Many leave their faith because bad stuff happens, and they blame God.  The problem is that the Bible is clear on this.  There is no answer, for the most part, other than God saying “Trust me.”

The opposite of this is a person that does not tithe but is doing really, really well.  I would state in this case this is the most subtle form of temptation.  In this case, the person does not recognize the need to give back to God.  When we get into this situation, we are are very dangerous grounds.  Jesus spends a lot of time talking about money in the Bible.  The issue is that he says that the love of money and the world can squeeze him out.  If you are doing well, and a Christian, and you are not tithing, I would suggest that you are also falling away from Jesus pretty fast.

But most of us will never live life at these extremes.  We need to know that these extremes exist, but most won’t see them.  The vast majority of people will simply not recognize that the general rule in the Kingdom of God is giving and God will give to you.  It turns out that giving with the right heard is key, but if you don’t even try, you will never know God’s blessings.

The final point is that God’s way is not our ways.  I am active in the Silicon Valley, and I have made a pretty good life for myself.  It turns out that my career is actually down hill.  When I was younger, I was a vice president at a good size firm.  I thought that my career was all upwards from there.  However, through a bunch of twists, I ended up being downgraded in my job role.  This was really hard for me to take, and some times I’ll even get a little twinge now.

What looked like a downgrade actually turned out to be an upgrade because I didn’t get the title, but I did get a nice sum of stock, which I mentioned above.  This chunk of stock then allowed me to invest and grow my money, but outside my current line of work.  Now mind you, I really like my job.  I think it is challenging and insightful.  However, it is only one contribution to my overall income.  So, although my employer does not pay me as much as I would have made as a VP, my overall income is the same, and in reality, my future income is much, much better.  My current income from my job ends when my job ends.  My current income from my investments stop when I die.  It turns out that my investment income has been surpassing my employment income for the last few years.

For us, we found a particular ministry that gets a substantial part of our tithing because I feel the Lord spoke to me to support this ministery.  I have mentioned Sister Schools before in this blog, but the Lord placed on our hearts that this should be our main focus.  However, we do go to a local church, and we also tithe there.  Our local Pastor is not much on pushing hard on the tithing thing, although he does bring it up from time to time because of the Biblical imperative of doing it.  He mentioned some numbers one time, and I was happy to understand that we were doing our part to support the local church.  In other words, if others support the local church similar to ourselves, we would be on firm financial footing.  In a section in Corinthians, Paul calls out that you are supposed to support those that are spiritually feeding you.
In summary, there is no guaranty how God will treat the individual, but there is no doubt, on the whole, those that give to the Lord will be blessed is a miraculous way.  While my time of Job may come, the journey up to now has been magic.

Wednesday, August 01, 2018

“Mind and Spirit”–> Why Is Work So Miserable

Image result for the three signs of a miserable jobOkay, Lencioni has done it again. 

My favorite business author has written another winner in “The Three Signs Of A Miserable Job.” 

As normal, what can summarized in basically two pages, Lencioni weaves into a longer story, or parable, to drive the message home.

The book is worth your time, not because it teaches you anything new.  It teaches you what you already know.

The book features a mythological figure named “Brian Bailey.”  A man, who recently sold the company that he is running, and has retired to Lake Tahoe with his wife.  However, he finds little comfort in his retirement, as he feels something is missing.  Although he and his wife plan to spend the winter skiing, an end of the day accident keeps him off the slopes.  Once off the slopes, with plenty of time on his hands, he finds that he is looking, or really he is driven, to find something else.

During this down time, he finds himself pulled into being a small partner in a restaurant that is barely hanging on.  The owner makes a little money, just enough to ski when the owner wants to.  Brian comes in and offers him money to buy a small part of the diner, and he runs the weekend shifts.

Lencioni takes us through his struggles to get the place working on an even keel.  As in so much of his work, Lencioni points out that the problem is normally not with the capability of the worker, but with the situation that they find themselves in.  In this case, he discovers that in everyway, the employees are miserable.

Thus we go off on a journey to find some meaning in employment.  In terms of the common vernacular the employees are not engaged, which means that they are bored.  When the employees don’t care, we find that they don’t do a good job and the place of business suffers.

Into this situation, Brian discovers some new principles.  Principles that perhaps he has used before, but certainly nothing on a cognitive level.  He discovers a system that allows his employees to get engaged.

So, what  is this mystical formula?  What removes misery from a job?

There are three things, and although I encourage you to buy the book, I’ll list them here.  However, I actually believe that you’ll learn them better by reading the book and returning here.  So, if you want to do this, I know the book is on Amazon Prime, and can be downloaded.

I’ll wait.

Okay, done with the book? 

The thing to recognize is that humans do their best work when they are totally absorbed by the work.  That is, they feel attracted to what they are doing.  I’m sure we all know somebody that is good at something.  In almost all cases, we’ll find out that the person is truly passionate about the situation and maybe is even a little obsessive.  This does not mean that you need to be “happy” because some of the best experts in any areas may be unhappy.  (It actually turns out that our happiness seems to be set by our genetics regardless of our circumstances, within some reasonable level.)

So if “job happiness” is not a good way of thinking about things, what do we call it?

The better term is “engagement.”  That is a person that is thinking and willing to jump into their job on a regular basis because there is something that draws them in.  It also is highly correlated with companies that do well in their area.  You almost always find that the successful companies or orgs have highly engaged people.

As normal, Lencioni jumps to the opposite extreme to find the way out.  Rather than saying “what makes you engaged?” he asks “What makes a job miserable?”  By removing the bad situation, he creates a good situation.  So he seeks to answer, “What makes a miserable job?”

Then lets dive into the first of the three principles.

Principle 1:  Measurability

Actually, this hit me like a ton of bricks because I knew this was true, but I didn’t recognize the importance.  If there is one thing that is easy to overlook, it is this principle, so it is worth digging into.

“You can’t manage what you can’t measure” is the principle that is often subscribed to Peter Drucker, the management guru.  However, Lencioni goes a lot further than this.  What he calls out is that any job without clear measurement is a job of irrelevance.

“I get measured by the bonus,” you might say.

“Really?” I would reply.

I doubt that your life has been all that much different than mine.  In reality, I have found out that in most jobs it is all about luck and the person above you.  I have seen over and over again that where these two factors rule in most environments for the bonus. 

It is important to realize that we often discount and don’t understand the issue of good and bad luck.

Luck is present in many different circumstances.  Nassim Nicholas Taleb has written all about luck in “Fooled by Randomness,” and I’m not going to repeat his lessons.  However, he clearly points out, and proves in my mind, that most people cannot distinguish luck from skills.  I have seen many times where a lucky person (because of the job or the customer base) gets a bunch of positive reinforcement, while and unlucky person is blamed for the unluck of the situation.  In reality, most people try and take credit for more than they deserve because of a principle called fundamental attribution error.  (And generally, they won’t give others the same breaks.) 

If your boss likes you, you’ll find that you get a lot more perks and better bonuses.  In the best case, you show a personal commitment to each other.  In the worst case, this turns into a favoritism that substitutes politics for performance.  Don’t get me wrong, I actually believe that friendship is very important, but it only comes after being measured in a clear way.

So to get away from this, you need to focus on things that you can clearly deliver.  If you can do this, you can remove the attribute of luck away from the job.  This restores your own power, and gets you more engaged.  So, you need to be able to measure something that you can influence.

In the book, he does a great job of manufacturing ways of measuring for things that don’t seem measurable.  With one person who takes orders, in the book, he asks them to measure smiles.  Simply getting them to track and seeing progress of a very simple thing such as this starts to drive change.  The point is that he calls out that you need to measure something you clearly control and is important to job success.  The more you do this, the more engaged your employee will be.

I think this principle is found in every video game.  Video games have no meaning, except that they furnish you a score for doing nothing productive.  Yet, a good video game is addictive.  If we can find a score, we can find engagement, then success.

Principle 2:  Irrelevance

This one is much more of a mindset.  If you have a job that does not leave an impression, then you have no job at all.  Everybody that works wants to build or make something.  The problem is not understanding how your product or your service changes somebody’s life. 

The search for relevance is something that needs to be found within.  Or, if you are lucky enough, a good manager should be able to help sort it through.  If you read my personal blog, you will find that I spend a lot of time talking about things that we do around my property in Los Gatos.  The nice thing about physical labor is that you can see something happening.  You can see the changes taking place.

For myself, I am changing my property for three reasons:

a. It teaches my boys life skills.  Knowing how to build something that you can live in, touch, or use is tremendously fulfilling.

b. I provide a cool environment for our renters to live in.  One of the high compliments is that one of my renters came to me to say, “I can tell how much thought and work you put into this.  It is really impressive.”  I carried these words with me strongly even now.

c. I hope to leave my property to my kids because it is unique, and will give them cheap living in a economically prosperous area.

I find much of this in my job also, but not as clear as my personal life.  After reading the book, I am going to meditate more on how to make my job even more like my home life.

Principle 3:  A Place Where People Know Your Name

While this is a line from an old TV show, it resonates because it is true.  The point is that we are needing community.  The best of all workplaces is where we care about each other more than just inside of the work environment.  There are many problems with this, because I talk about it above.  If not appropriately managed, it can turn into nepotism.

However, it is also tempting not to get too close to people because it opens us up to hurt.  Maybe they will leave.  Or perhaps it will be painful for us to confront bad behavior.  However, the benefits are more than worth it.  When people know you name and your background, it turns out better.

As a matter of fact, Gallup has been doing polls of high performance workplaces for years.  One of the key factors in high performance places is if you answer “yes” to the question, “Do you have a best friend at work.”

He builds up a triangle at the end of the book so you have a simple visual of the three items.

Image result for the three signs of a miserable job

As mentioned earlier, there is a tremendous amount of research on engagement.  In the end, a team and individuals that are engaged in a job is the hallmark of a high performance organizations and high performance teams.

The challenge has been crossing the bridge between “what we know” and “how to get there.”

As his normal process, Lencioni lays this out by virtue of a short story or parable.  It is the same device that Jesus used in the Bible.  The power is in the tale.  While you may recognize my summary as true, I don’t think that you will learn the true lesson until you read the story.

I highly encourage you to get the book..

Sunday, June 10, 2018

“Mind, Body, & Spirit”–> What We Can Inherit

imageSteven PInker is a well known Harvard Psychologist that has written a number of interesting books for the lay person.  One of these books, “The Blank Slate” influenced my views of people’s environment and inherited traits many years ago.  I was listening to a podcast with him, and he got me thinking about about this again.

In the podcast, PInker called out that he considers one of the major achievements of modern psychology is the tracking of identical twins (or monozygotic).  He said the rearing of identical twins by the same parents are “one of the most profound discoveries of modern psychology.”  (Start at 32 minutes on this podcast linked here.)


Think about these twins.  Twin is where a split of the mother and father’s genetic material that is virtually identical between two people.  Now, place this genetic material into the same household, and I think anybody could understand that the major outside influences will be similar.  I have known some twins in my life time, and while it is conceivable that the twins could be treated differently, my non-scientific, but rational response is that most parents will treat their child virtually identical.

Now ask, “how similar are these kids?”

It turns out that by most observations, the identical twins are somewhere around 50% the same.  This is an interesting factoid, because there is so much the same, but both the environment and the genetics can only contribute for roughly 50% of the variance.

Let me unpack this for you, because Pinker rightly calls out that this is a mind blowing fact.

Here is an interesting table from


IQ is just one trait, but easy to understand.  Most people focus on the fact that identical twins are more related in IQs, even when raised in different households, than fraternal twins that are raised in the same household.  But this chart shows a very interesting output.  When you move identical twins into the same household, they do not converge at 100%.  Mind you, a correlation of .86 is just outstandingly high.  No doubt about it.  But when two kids are raised in the exact same environment, you would expect the correlation to be .9x.

Now IQ is the simplest thing to correlate, and when Pinker takes a look at many other factors, he arrives that when identical twins are reared together that we actually see overall a .5 correlation in their overall attributes.  He rightly brings up in the podcast that this is surprising.

There has been a classic war between the “good or bad seed” mindset and the “the mind is a blank slate” mindset.  The good or bad seed (GOBS) mindset will declare that somebody is bad because their parents are bad.  They will say that somebody is good because “they got lucky and inherited some good genes.”  I look at my own parents, and by in large, they had a tendency to believe that people maybe were a bit more genetically wired than they were environmentally wired.  (However, they acknowledged both.)  Generally, these people tend to be more right leaning in their politics.  They believe that the poor people are going to be poor due to the way that they are wired.  These are the folks that believe that spending more an more money on social programs don’t have a lot of benefit because you can’t change human nature.

The mind is a blank slate (MIABS) believe that all difference in the society (or the vast majority of the difference) is driven by the environment in which somebody was raised.  In their viewpoint, if we would invest in more training, schooling and social justice systems, we would raise the bottom up, and they would be just as successful as the top.  For them, we are wasting vast human resources because we don’t understand that environments are the thing that cause people to be split into different social strata.

So now look at identical twins raised in the same household:

1. Their genetics are virtually identical

2. Their environment is extremely similar. 

The “dividing line” of both of these major factors only contributes around 50% to the similarities. So what makes up the difference?

Pinker suggests two things:

a. Perhaps DNA gene expression is slightly different.

b. Random chance

To make a long story short, it is beyond obvious to me that “b” is the predominate answer.  Nassim Nicholas Taleb has written on this to great extent.  If you take a look at the research in behavior economics, you will find that we are almost blind to chance.  We always want to assume that everything is predictable and comes from somewhere.  However, the twin data would suggest that  maybe around 50% of our life is dictated by the “luck of the draw” as much as the environment or genetics that we have received. 

I got to see this first hand.  In my previous employment there was a set of identical twins.  I remember that I met one of them, and then I saw the other one on the stairs.  At the time, I did not know they were identical, and for the life of me, I could not figure out how the woman that I had met one day some how grew out her hair on another day.  Was it a wig?  Was I going crazy?  Then somebody told me that I had seen her twin.

Both of them were successful, and they spoke the same and had extremely similar habits.  They both worked in the same business.  However, one of them was a director level, and the other one wasn’t a director level.  I don’t believe that I saw any major difference between them, and they were raised in the same household. They worked at the exact same company, so they saw the same environment at work.  Yet, they did not have the same level of title or pay. This speaks to something other than genetics or environment drove the difference in titles.

To me the answer is extremely simple.  One got presented an opportunity and the other did not.  In other words, one “got lucky.”

My wife and I have a great romance.  After 30 years of marriage, we truly and deeply love each other.  However, there would have been a thousand ways that I could have missed my wife.  She could have gotten a scholarship to Oregon to run.  I could have elected to stay in drama rather than join track and cross country.  She may have never turned up at my dorm room after I indicated that I was interested in her because of something I had said.  There are thousands of students at my college that I never got to know.  However, by chance, we met.

As another example, I have turned out to do pretty well financially.  While I would love to say, “Hey, I earned this,” in reality, I also got extremely lucky.  After one turbulent session of my life, I just happened to fall into a place where I got some stock, then I was fortunately enough that I was so busy that I really didn’t think about it until it had gotten to a pretty high number.

Or in my latest example, I was forced to move, and I ended up inn the Silicon Valley.  We found a house that had not sold for roughly two years, but by sheer chance.  Then we were able to rent out a couple of dwelling on our property, which now covers roughly 60% of our mortgage, property tax, and property insurance.  I think that if I had gone off and expressly looked for a situation exactly like this, I would have not been able to find it.  It was by random chance that my wife and I accomplished it.

Or was it?

As a Christian, there is yet one more way of thinking about things, and the thing that we need to think through is it “random chance” or “divine providence.”  Once we start to understand that there is a true and powerful aspect of a control factor in our life that is not our genetics or our environment, we now need to consider if we believe in a personal God.  If we don’t, the uncontrolled is call chance.  If do, then we commit an error by saying that we got lucky.  The word of the day is divine providence.  This is the idea that God works through everything and controls our environment. 

This idea is firmly rooted in the Bible, but while we know that God works the environment, it is clearly called out that we are not fatalistic.  For example, in the book of Ruth, when Ruth finds herself in a position where she may influence the King to save her people, but she is afraid to make the request, her Uncle clearly understands that she may have well been placed there.  “And who knows but that you have come to royal position for such a time as this?” states her Uncle.  (Ruth 4:12)

Sometimes we want to want to say “well I’m influencing God by my being good or bad.”  I think that Jesus answers this when somebody tried to find out why people got into trouble.  He sites a disaster where 18 people were killed in a building collapse.  He says, “Or those eighteen who died when the tower in Siloam fell on them—do you think they were more guilty?…I tell you, no!”  (Luke 13:4-5)

So, as a Christian, we are to understand that there are things beyond our control, and that it is the environment that is controlled by God that influences maybe around 50% of our outcome and life.  We now understand that it is not our actions that control what happens to us, but God’s purpose for us.  However, I think we have a grave area if we stop here.

There are two important things that we will fall into if we do not understand the scriptures:

a. We are fatalistic:  we cannot influence anything

b. We ascribe our being “good or bad” to the reason God works in our environment

As I mentioned earlier, Christianity is not fatalistic.  It does not think “God is going to do anything God is going to do.  So all I need to do it watch.”  On the other hand, we are told that God takes care of those that love him, but we have many stories and direct teaching that trying to be good does not guaranty that we will be financially taken care of, and we won’t have any problems.

The key behind Christianity is that we have a personal God. 

This personal God can be influenced by prayer and asking. 

Now, let’s be clear, the Lord isn’t big on giving you what you don’t need.  However, he is very open to doing remarkable things in your life if you ask for the right things in the right way.  Then if you get what you asked for, you need to receive it and use it, in the right way.  The key is to completely understand that God is not a piggybank or an ATM.  Our personal God is likened to a parent.

Let’s say that you ask the Lord for more salary or a better living situation.  Then, by some miracle, you get these things.  If you do better, and you aren’t paying tithes on this increase, I think you will have a problem on either a spiritual level or maybe even a physical level.  I am not suggesting that you take all of your wealth and give it away.  I am simply saying that there are simply things that we are called to do as Christians that we need to show some discipline and knowledge. 

This is an old fashioned concept that it called stewardship that I am afraid that we have forgotten as a church body.  I was recently reminded of this as I was flipping through some old TED talks, and a session from Rick Warren was brought up from 2007.  When I watched it, I actually started to tear up a bit.

In this TED talk, Warren describes writing the Purpose Driven Life.  He said that it has sold millions upon millions of copies of this book, and after he wrote it, the money started flowing in.  He said that he did the following:

a. He calculated all the salary that he had pulled from the Church that he had started, and paid it all back.

b. He started to give away 90% of his profits from the book

c. He and his family lived on 10% of the profits from the book

He said that he was not shying away from the fame that came with the book.  He said that both the money and fame was something that God gave him, and the call is that he was going to try and use both for God’s glory.  He called out that he was going to be a steward of this wealth, and he would use the wealth and fame to try and glorify God.

My wife and I were privileged to go to Saddleback, the church that Warren started, while we were in SoCal.  While I have read many vicious attacks by both religious people and secular people on Warren, this is not the Rick Warren that I ever saw.  While we did not know him personally, he would sneak out during the service once in a while and give people hugs.  My daughter and son got a dose of hugs from him. 

Talk about somebody that is ready to show his warts. He was incredibly transparent about the grief in his life when his son died.  His wife and him open chat about how they struggled to not get divorce, and how he had to pay to marital counseling because they couldn’t get along.  Kay open admits that she struggled with porn at a young age. 

I am sure that some reporter will publish a future expose finding out even worse stuff.  Maybe Rick was cruel to a staff member, not thoughtful about a situation, or made a bad judgement.  However, in the big scheme of things, I do not expect to find a saint on this earth.  He and his wife are open about their failings but keen on trying to be the best stewards with what they have.  I keep love and respect the Warrens from what I have seen.

In the end, we need to learn that we should not be shy to ask for stuff, but recognize that we are called to be stewards of what we have.  We are not going to be perfect, but we need to strive and ask for help.

Our life is not environment, genetics or fatalistic.  Our lives require us to balance the whole, and do the best we can, while understanding that we are not perfect.

And if we do this, we will feel God’s pleasure.