Mental accounting
What you don't know could hurt you
What’s up guys, it’s Graham here. If it’s your first time here, hit the subscribe button below to join 40,000+ smart investors and never miss an update on the market again. It only takes a second.
There’s a joke about an old couple that goes to Las Vegas. While the wife is sleeping, the husband takes $150 down to the casino and tries his luck on the slot machines. He manages to turn the $150 into $500. He feels like he’s going to get lucky on the roulette table next and calls three turns right. He then takes his winnings to the blackjack table, and the poker table, and so on: till he has $10,000 in his hand. Before going up to his room, he decides to try his luck one last time on the slot machines and bets all his winnings. But this time, he loses.
He returns empty-handed to his room where his wife has just woken up and she says, “You look a bit sad. How much did you lose?”
“Ah, not much,” he replies. “A hundred and fifty dollars.”
I found that joke amusing the first time I heard it, but it’s exactly how people’s minds operate when it comes to perceiving their winnings as separate from their starting capital. It’s an effect called mental accounting. It’s not just restricted to gambling – Day-traders fall prey to this flaw quite a lot. When newbies start trading stocks, they might get a small profit (and it’s uncanny how often this happens) due to beginner’s luck. They confuse their luck for skill and keep trading. At some point, they start losing but they perceive their investment returns as different from “their money”. But when it starts to go downhill, it can spiral very fast.
The added catch is that the IRS sees wins and losses very differently. When you’re getting started with investing, maybe somebody told you, “Even if you make a loss trading on the stock market, you can just write it off!” As this caller on the Dave Ramsey show found out, that’s not how it works. If you make a profit of $300,000, you have to pay taxes on the entire amount. But if you lose that same amount, you can only write off $3,000. That figure is not adjusted for inflation and it makes no sense and it’s extremely unfair – but it is what it is. Getting started with investing without knowing quirks like these that can trip you up could cost you a lot in the long run. Check this video to find out why day trading is a terrible idea and to learn about the fine print that you’re missing:
Back to California
A year after the great resignation and migration of Silicon Valley employees from California to Texas, new data shows that the trend might be reversing. Companies like Tesla are reversing their policy and mandating a return to office, employees are returning, and California is once again on track to be the talent magnet that it was before the pandemic began. Having said that, I wanted to dive a little deeper into what the differences in productivity between in-person and remote work look like, what the research says, and whether I’m considering moving back to California:
The yacht experience with Enes Yilmazer
This week on the Iced Coffee Hour, we did something totally unlike our usual episodes – we didn’t just take the podcast off location, we took it across countries and shot on the ocean! Enes Yilmazer invited me and my friends to spend a week on a super-yacht in Croatia for absolutely free. We got to catch up with him and ask him about how anybody could enjoy the same experience in a cost-effective way with their friends, how he lands deals like this, how he picks properties to create content on, and his journey so far. Despite spending all of his time on luxury properties, Enes is one of the humblest and most down-to-earth content creators I know, and I learned a lot from this episode:
ROI on education?
When people make major purchases, like buying a house for $400,000 or buying a car for $20,000, they do a lot of research and comparison before making up their mind. Especially if it’s an investment, they at least think about what the return on investment (ROI) will be. But I find it baffling that with something as important as a Bachelors’ or Masters’ degree, that could cost anywhere from $40,000 to $70,000 and get you in debt at a time of your life when you haven’t started earning yet, many people have no idea what that education is going to get them. I watched one of Caleb Hammer’s most popular and controversial videos – and I have a thing or two to say on how to go about planning your education and going to college, after watching this one:
So that’s it for my weekly round-up. See you next week with another bunch of exciting videos!
And force of habit – Smash that like button to help others find this newsletter. Hit that subscribe button if you haven’t done so already!
That is a dream of mine to be able to afford a yacht trip like that someday way down the road! Great videos