Guest User

February 9, 2023

Episode 239: The Math of Financial Planning

Guest User

February 9, 2023

The concept of financial math is another foundational element of investing and good economic decision-making, and today we are carrying on the recent string of shows dealing with these kinds of fundamental aspects. First, we have a look at the central idea of the time value of money, and how this plays into many areas of our finances, such as retirement planning, spending, investing, and so on. From there, the conversation goes on to cover exponential functions, the tradeoffs between saving and spending, and regrets. Today's 60-second episode recap is of the great conversation we had with David Blitzer back on Episode 54, and we also do a quick book review of the potentially life-changing How to Live on 24 Hours a Day. We finish off this punchy episode with some news from the community and some thoughts on the ways in which competition and repetition can improve a skill.

Key Points From This Episode:

Introducing the time value of money, as well as the concepts of compounding and discounting. (0:03:07)
Applying financial math in different ways to varied questions. (0:11:34)
Lessons from Cameron's first business selling worms. (0:18:15)
The challenges and biases associated with exponential functions. (0:20:27)
Spending and saving; illuminating the reality of the tradeoffs. (0:27:26)
The biggest problems of foundational regrets. (0:35:40)
Looking back on the episode with David Blitzer on indexing. (0:42:33)
Reviewing the 1908 book, How to Live on 24 Hours a Day. (0:44:25)
TV shows, podcast reviews, updates from the community and more. (0:49:05)
Incentives and leaderboards; unpacking the impacts of practice and competition. (0:56:43)

Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to Episode 239. Another week, Ben.

Ben Felix: Another week.

Cameron Passmore: The weeks keep on coming. Anyways, quick overview of today's episode, we discuss another fundamental topic to financial decision making, which is financial math. I do indulge myself in your feature this week, so I hope people are patient with some of my stories, but it was a pretty important time in my life that links directly with your topics.

Ben Felix: I think people will love it. What are you talking about?

Cameron Passmore: I don't know.

Ben Felix: It's like Robert Merton when we had him on the podcast, he kept apologizing for giving us these great answers to the questions. He's saying, “Oh, I'm sorry. I'm going on.” But, no, no. Please. Please, go on.

Cameron Passmore: Any comparison between me and a Nobel Laureate, I will accept. We also take the chance to review in 60 seconds the past episode we had with Dr. David Blitzer in episode 54. He was the Chairman of the S&P Dow Jones Index Committee. Super cool conversation.

Ben Felix: Cool episode.

Cameron Passmore: We also review the book, How to Live on 24 Hours a Day, by Arnold Bennett. Really cool little book. Our next section, we have notes on it, but we're frankly not really certain what to call it. That's a follow-up to our conversation two weeks ago, where we talked about how we're here to help more Canadians with their wealth management questions. I've had a bunch of people reach out, so we thought we'd do it again, quite frankly. We're pretty proud of our offering. We believe we have an incredible team that can offer incredible help to people.

Ben Felix: You mentioned, we don't know what to call — we label all of the sections for ourselves. This one, we weren't sure what to label with, but we've realized, we talked about this last time, we don't do enough to market ourselves. We want to be more deliberate about talking about the fact that PWL is a firm that we work for that has a good offering that a lot of people could use. Our team, which is a great group of people, they all listen to the podcast. We give advice that's in-line with the podcast. For people that are listening, even if you yourself are a finance nerd, or geek, whatever you want to call it, which realistically, many people listening are, what we noticed last time we mentioned PWL on the podcast is that quite a few people got in touch.

We're not getting in touch with themselves. They're getting in touch, because they have a family member, or someone that's close to them that could use our advice and service, even if they as an individual can't. If you're in Canada and think that yourself or a family member could benefit from PWL’s service and advice, please don't hesitate to get in touch with us. Pwlcapital.com is a webform, or info@rationalreminder.ca.

Cameron Passmore: Exactly. One of the team, we got right back to you. All right, ready to go to the episode, Ben?

Ben Felix: Let's go.

***

Ben Felix: Welcome to episode 239 of the Rational Reminder Podcast.

Cameron Passmore: All right, so for the first topic is on financial math, which I think is such an awesome topic. I must say, as I read your notes, which is people know I don't usually do, because I try to listen as a listener. But the subjects you cover go right back to a time in my life, back around 1973. I’d be seven-years-old when a lot of these concepts came together vividly and I think about it often. Back then, I started earning income. Yes, at seven-years-old. I started a business. Selling worms still was a business, saving money, learning about compounding and consumption.

We got a new mall in our city. We got a new mall in Sherbrooke, which was right next door. All this happened at this time, so I'm going to relate some stories from that time to your discussion. That's my preamble to you talking about financial math.

Ben Felix: All right. Ready to jump into it?

Cameron Passmore: Fire away. We got to start with the time value of money, which is fundamental to all of finance and personal finance. When you invest money, you expect to earn a rate of return. When you borrow money, you expect to pay a rate of interest. When you leave money under a mattress, you expect to lose purchasing power to inflation. The result of all of those realities is that the value of money changes over time. That means that we can't compare dollars that you expect to receive in the future to dollars that you have today, because they exist at different points in time and time affects the value of money.

When money moves forward through time, it's called compounding. That's a term that many people will have heard of. When it moves backward in time, it's called discounting. Both compounding and discounting are fundamental and very important concepts. All time value of money calculations involve either compounding or discounting. That's moving amounts either forward or backward in time. Money is like a time machine that moves economic value through time. Mathematically, the way that mechanism works is what we're going to talk about.

Now thinking through this type of math, and we'll talk about the actual functions, the mathematical functions in a minute, but thinking through this type of math is not intuitive, because of compound interest, which is an exponential function. The idea is that when you earn a return on an investment in period one, in period two, you're earning a return both on your investment and on the interest, or return that you earned in the prior period. Over time, that affect compounds, which is why it's called that. You get an exponential, rather than a linear rate of change over time.

Compounding goes both ways. It increases the value of an investment at an exponential rate, but it also increases the cost of a loan at an exponential rate over time. To reiterate, this is all important, because comparing alternatives in financial decision-making almost always involves time. Almost always.

Cameron Passmore: So fascinating. The example I have, and it is so vivid. I applied at age seven to get a paper route. Look at back, the big paper was the Montreal Gazette. I applied and waited and waited. I finally got granted a route. I can remember the day, it was snowing out much like it is here today. Probably this time of year, I was going up a steep part of Clough Street in Lennoxville. It is that vivid. I remember exactly where I was, thinking about compound interest.

I started to save money from the paper route and thought about a $100 and it grows at 10%, which back then, that's what savings bonds are paying. 100 bucks becomes 110. 110 becomes 121 in two years. 121 becomes 133. I remember doing the math. I’m trying to remember to keep going. I was seven. I as a blown away that after seven years at 10%, it doubles. I remember my head just exploding at this realization that you're working to save, your savings could earn a bit. At some point, your savings keep going on their own. The compounding, like Albert Einstein said, it's just like the eighth wonder of the world. To a seven-year-old, this was so mesmerizing to be.

I ended up saving the money going down to the bank, because there's nothing digital, of course. You go to the little Royal Bank branch, and you go make your deposit. You get your deposit slip. You're filling your deposit slip and you wait in line to put your deposit slip, a little bit of money in the bank. Then it was savings bond. It will table tent sitting there for savings bonds, I bought a savings bond. Then I remember the teller asking me, “Do you want compound, or annual pay?” You just think about that, for a seven-year-old to think about this.

I’m like, “Okay. Just take that through comp and I get the money every year. But if I compound it as opposed to annual pay.” You put the order in, you fill in the paperwork, you get back your whatever, a $100 bond wherever it was. I took, of course, the five-year compounding. Liquid at anytime. Liquid at month end. Got my safety deposit box, put my little bond in the safety deposit box. It's incredible to think about the power of compounding as such an agent and incredible difference of interest rates between then and now.

Ben Felix: Less incredible now than a year ago, though, the difference in interest rates.

Cameron Passmore: For sure. Well, there's so many lessons learned in this past year as well. Carry on.

Ben Felix: Maybe not real interest rates. Nominal interest rates.

Cameron Passmore: Nominal interest rates.

Ben Felix: You come back to the concept of discounting. Just to think about the time value of money and why this all matters for financial decision making, take a simple example of the decision to accept a payment of $10,000 today, or except $1,100 each year for 10 years. In one case, you're getting $10,000 upfront. The other case, you're getting $1,100 per year for 10 years. In total, not accounting for the time value of money, you're getting more money in a second option over the full course of 10 years. Which one you choose?

To compare them, we have to bring their values to a common time period. If we want to compare them in terms of dollars today, we have to bring them back to the present value. In the example, $10,000 is $10,000, because it's being offered to you today. Its present value is $10,000. For the $1,100 per year for 10 years, you're getting payments up to 10 years in the future. Money in the future is worth less to you today, because the sooner you have money, the sooner you can use it to earn a positive rate of return by either investing, or paying down debt.

To account for that opportunity cost, the math works like this. The payment received end periods from now is worth a $1 amount of the future payment divided by one plus the rate of return that you would otherwise earn each period on those dollars, to the power of N. In the YouTube video, put a picture of that equation, so that you don't have to imagine it. To find the present value of $1,100 annual payments over 10 years, we would manually do this for each feature cashflow. Put in present value terms and then add them up.

More easily, we can use a financial calculator, or an Excel spreadsheet. I'm going to use a 5% discount rate, or rate of return. That question is really important. What discount rate should you use? I remember when I was doing my MBA, I did my whole engineering degree without any – well, not a lot of finance education. There was maybe a little bit of business stuff in engineering, but not a ton. I remember, when I started doing my MBA with a finance concentration, we were talking through something like this.

I don't know what it was, specifically, we were talking through something like this and one of the students in the class asked, “Well, how do we know what discount rate to use?” The professor just laughed. He said, “Yeah, exactly. You don't know. You don't know what discount rate to use.” But that doesn't matter. It can still be informative for decisions, because you can look at well, what if the discount rate was this? Or if I assumed the discount rate is this, then what decision would I make in that case? With a 5% discount rate, or rate of return, in this example, the present value of $1,100 per year for 10 years is only $8,919. In that case, you would take the $10,000 today. But what if you had a different discount rate? I sold it for at what point are they equal? Ignoring other stuff, like flexibility, I guess. At a 2.18% discount rate, those future payments are equal to $10,000 today. In that case, you'd be at least mathematically indifferent between the two options.

Cameron Passmore: What strikes me about this example, and it's so important is there's information in that number, the difference between the 8,919 and the 10,000. There's information there. It's telling you the discount rate, or the expected return rate. If it's got a higher interest rate, is it riskier, whatever that investment might be? Use that as information. It’s such a fundamental concept to investing.

Ben Felix: Financial math can go in all different, just like any other type of mathematics, you can look at situations from so many different angles, using this type of math. The exact same type of math. The exact same thing can be used to do things like compare pension start dates, if I start my pension at this age versus this age.

Cameron Passmore: Good point.

Ben Felix: You'll have different cash flows. You'll have fewer periods, because if you're starting later, your life expectancy relative to that later start date is going to be shorter. You can look at what is the difference in present value between those two situations. You can also look at what is the difference in the implied return between those two situations. Another one that's pretty interesting is you can calculate the implied financing rate on monthly versus annual payment options.

If you have the option to pay your insurance premium once per year, or monthly and they're different total payment amounts, you can calculate what your implied financing rate is by paying monthly. In some cases, maybe it's like, you're effectively borrowing at a credit card-like interest rate.

Cameron Passmore: It's funny. My son James got an offer to switch his car. Did I tell you the story?

Ben Felix: No.

Cameron Passmore: He got this automated email from the local dealership and they said, “Switch your car, we'll give you this newer model.” Whatever the payment, is only three something every two weeks for seven years to own it. We did the implied math on it. It was way above what typical car rates are right now.

Ben Felix: I remember doing this years ago for cellphone financing. Apparently, it's gotten better now. I remember, they offered you can pay cash for the phone, or you could finance it through your plan. I did the same thing. I went and calculated what the implied financing rate was and it was 20%, or something like that.

Cameron Passmore: I just did mine. It was at zero.

Ben Felix: Yeah, yeah, yeah. Apparently, they've changed this.

Cameron Passmore: I guess, there's so much margin in the phone, that probably is why it was zero, but it was zero.

Ben Felix: I asked — where did I go? Yeah, Apple Store maybe, six months ago, and I told them, well, I don't want to do it this way, because the implied financing rate is high. The guy said, “No, no, no. That's changed.” Apparently, that's different now.

Cameron Passmore: In fact, in my case, he said, you have to finance because my carrier is giving, I think a $20 monthly credit if you finance it.

Ben Felix: Interesting.

Cameron Passmore: I guess, that's to keep you locked into their contract. I don't know.

Ben Felix: Anyway, so the point is –

Cameron Passmore: We digress.

Ben Felix: - making any financial decision, like when we're just talking about random stuff, like cellphones. Making all these financial decisions, they almost always involve money. They almost always involve time. To compare alternatives, we have to be able to bring things back to a common time period, which is what financial math lets us do. The other place where discounting future cash flows is extremely important is when we start talking about stocks and bonds. We covered that in Episode 231. It's the exact same concept. The $1,100 per year for 10 years, those are future cash flows. We're assigning a discount rate to decide what they're worth today.

A stock is the exact same thing. The future cash flows are unknown, or less known in my example, but we can still use the information in prices to look at what the discount rate, or at least differences in discount rates between stocks. The same general concept.

Cameron Passmore: Look at bonds this past year. Interest rates went up, bond values go down. That's why. A lot of people aren't aware of that inverse relationship.

Ben Felix: Financial math. Exactly. Financial assets are streams of future cash flows. Stocks and bonds represent streams of future cash flows and they're bought and sold based on their present values at any point in time. Like you said, Cameron, discount rate changes, you would expect the asset prices to change. Discounting tells us about the present-day future cash flows. Compounding tells us about the future value of money borrowed, or invested today. Define the future value of an investment and periods in the future, we take its present value and we multiply it this time by one plus the rate of return, or the discount rate to the power of N. Again, we'll put a picture on the YouTube video, so you can see it.

Now, importantly, and it's clear if you're looking at the images, you can see that these are exponential functions. We're going to get into detail about why that's hard to think about, but that's just a very important point. If you take $10,000 invested today with a 5% annual rate of return, the numbers aren't that dramatic. I should have used a higher rate of return, but $10,000 invested at a 5% rate of return is worth $16,289 in10 years, $26,533 in 20 years and $43,219 in 30 years. That's time having an exponential effect.

Then also, if we substitute in a 7% rate of return to that previous 30-year example, instead of 5%, we're at 7%, instead of 43,219 at a 5% return over 30 years. At 7%, the future value is 76,123. Relatively small increase in the annual return. Relatively large difference in ending outcome.

Cameron Passmore: The more time, the bigger the difference.

Ben Felix: Correct. Warren Buffett is a great example of this. These numbers are just crazy. He's had high returns. Berkshire Hathaway has beaten the US stock market by a pretty wide margin over its full life. Buffett is 92-years-old today and he's got a net worth around 110 billion. The crazy thing about Buffett's wealth is that about 97% of it was gained after his age 59. 97% of his wealth was gained after his age 59. He was still a billionaire at age 59. He's worth about 3.8 billion at that time, from what I could find online. The effect of the exponential function of compounding has been just dramatic on his wealth.

3.8 billion at age 59, a 110 billion now. 97% of that gained after age 59. Now again, the same type of math can be used to answer complex questions. We gave some examples earlier. Other ones that are interesting in this case might be things like, whether you should contribute to your RRSP, your tax deferred savings account, or your TFSA, your tax-exempt savings account. Whether you should invest or pay down mortgage debt. They're interesting applications. Again, this is all relevant and important, because we can only compare dollar amounts at a common point in time. Anytime that we're making a financial decision, we have to think about some consistent time period in order to compare alternatives.

Cameron Passmore: Buffett is such a great example. I mean, he often talks about the power of compounding progress and how much the world has improved over his lifetime. You look at the quality of life that was around when he was born compared to what we have today. You and I have the same cellphones, basically the same water, same access to books and movies as the billionaires do. But all of this is much better than the billionaires a 100 years ago. It's an amazing story.

Speaking of stories, I want to share this one. I started my first little business when I was seven-years-old. 1973. I'm holding up a sign, you can see it there. Can't see the English part. I put this sign in our front yard that said, “Worms Vers.” Vers is worms in French. I didn't know that either. I started selling worms to my father's friends who were fishing regularly at their camps and whatnot. End up picking worms and my parents said, “You want to sell more worms, you got to,” they didn't say scale, but you have to build a bigger business.

I went out, invested. I remember distinctly, $70 to buy worm beds and bedding. I couldn't believe I was spending money to try to make money. It’s a whole concept I didn't know anything about. Buffett's point is just a little micro example, where you invest money with the objective of growing something, compounding a service and creating more value on the other side. That's exactly what happened. I remember spending the $70, but I had enough bedding for a few years and we're selling lots of worms. We're making the hundreds of dollars, if you can believe it, in a summer. It was just unbelievable that this could happen to me at such a young age. It's just a neat little micro example of investing the business, compounding service and compounding value, creating value over time.

Ben Felix: Very cool.

Cameron Passmore: I think it's the first time we've used the word worm in our podcast. Little known fact. I don’t know.

Ben Felix: I wonder if that's true.

Cameron Passmore: Probably.

Ben Felix: Probably When else would we've talked about it? We talked about compounding and discounting, exponential functions that are very important for making financial decisions of all kinds. A lot of these get solved, or accounted for by calculators, like the financial planning software that we use effectively takes all this stuff into account. If you have a financial calculator, you can relatively easily do these calculations. But the point is to be aware of the importance of how the value of money changes over time and how that affects, or can affect financial decisions.

As importantly as that. There's the mathematical foundation. These are relationships that are true mathematically. Based on assumption still, that's a whole other thing. But given an assumption, the mathematics are factual. I don't know. Is that the right word? Math is –

Cameron Passmore: Math is math.

Ben Felix: Math is math. As important as that is, the other thing that's really important to understand, I mentioned earlier, that it's not always easy for people to comprehend exponential functions, which compounding and discounting are. There's a couple of biases that are really important when it comes to thinking about this. One is the exponential growth bias. This is the tendency of people to think about exponential functions as linear, which can cause all sorts of problems. It can explain empirically why people underestimate the interest that they'll ultimately pay on a loan. They can underestimate how much an investment will grow over time in the future.

Empirically, more biased households by this bias, this exponential growth bias, more biased households borrow more, because they underestimate the cost of borrowing. They save less, because they underestimate the long-term growth of an investment. The empirical result is that more biased households have higher short-term debt to income ratios, they have lower stock ownership as a percentage of their portfolios. They have lower savings rates and they have lower net worth.

Cameron Passmore: Incredible.

Ben Felix: Empirically, the bias matters. The other thing that's important here is that people are overconfident in their ability to calculate exponential growth, which further exacerbates the problem. To correct for exponential growth bias, financial Planners, or people making financial decisions have to use financial math to compare alternatives at a common time period. It's a lot easier to understand the benefits of investing, or the cost of borrowing when you're comparing the expected future value of the investment as a dollar amount, or the total lifetime cost of the loan as dollar amount.

That idea didn't originate from him, but Eric Johnson, who's our guest next week, his research is about choice architecture. He talks about this in his book, that it would be a lot easier for people to compare the cost of a loan if you just told them, the loan is going to cost you $10,000, instead of telling them what their interest rate is going to be and all this stuff. Real life is more complicated than that, because interest rates aren't always constant and there can be all sorts of different features and things of a loan that make it harder to compare.

Cameron Passmore: Well, go back to James's example, when you're presented with the costs every two weeks of the car, you can make a rash, short-term decision that has very serious long-term implications. On top of that, had he gone ahead with that, not being aware of the math of the loan, that's less savings he would have as he's missing out on the savings, plus the compounding on the savings. It's really like two trains going in opposite directions.

Ben Felix: It's the same train though, right? He's paying that cost and therefore, he's losing that cost. That's why you don't want to finance at 20%, because that's 20% that you can't allocate towards other stuff. Now, financial math is an easy area to talk about exponential growth bias, but exponential growth bias does not only apply to financial math. I think this is a really interesting and important point, especially because on this podcast, we try to talk about how to live a good life, not just how to maximize investment returns. Think about other areas, like exercising, diet, getting good sleep, they all have compounding effects on health and obtaining education is another one. Gaining knowledge. These have exponential effects over time as well on human capital. It's not just dollars that we can apply exponential thinking to, whether we should apply exponential thinking to, but it's hard. It's hard to think about.

Cameron Passmore: Just saying, those comments relate directly to the book we're going to review, which was unintended, but very interesting.

Ben Felix: Cool. A related concepts that's similar, but it's distinct and it's equally important to thinking about financial math, hyperbolic temporal discounting. That's the tendency of people to overvalue current rewards and undervalue future rewards. People will rationally value rewards in the future less, but empirically, people undervalue them more than they should, basically. Hyperbolic temporal discounting in standard economic theory, what I just said, I guess, we would expect people to have a preference for current consumption over future consumption, when the expected rate of return on investments is below the rate of temporal discounting. If they're the same, then people will be in different. Hyperbolic discounting makes the time preference discount rate higher than it should be, which leads to procrastination, or no saving at all from the perspective of personal finance.

Now, the problem which stems from compounding is that the costs of prioritizing now at the expense of later increase exponentially over time. If you're not saving any money this year, it won't have much of an effect on your net worth. But compounded over many years, it has a dramatic effect. You don't really notice the incremental effects, but you notice when you don't have any retirement savings, when you're 65-years-old. That's how those things happen. Slowly, and then all of a sudden.

Cameron Passmore: Do you ever have an image in your mind of your lifetime earnings? I get this image in my head, almost like a balloon, right? Long clown balloon. They get bumps in the balloon. If you think your life is this long balloon, you really got this big bump in the, whatever 20 to 60-year age. Really, what you're trying to do is flatten that bump out and push some of the air towards the end of your life. You're trying to shift consumption forward. Take advantage of compounding and saving.

Ben Felix: Yeah. That's the permanent income hypothesis, or the lifecycle investing. That's like the Modigliani and Merton have done a ton of work on that stuff. You're exactly right.

Cameron Passmore: Such a simple concept. If you don't try to squish the balloon down as you're going on, there's less air as you get older to push ahead.

Ben Felix: The economic prediction is that there's diminishing returns to consumption. The marginal utility of consumption decreases as consumption increases.

Cameron Passmore: I use balloons. You use marginal utility.

Ben Felix: Well, works out to be the same point, though. Because of that, people will smooth their consumption over time. They'll borrow or not save when they're younger. Then they'll dissave, or spend their portfolio down, when they're older.

Cameron Passmore: In fact, if you're borrowing, you're actually shrinking your balloon out here. You're pushing air back to today, because you're bringing future consumption forward.

Ben Felix: Your balloon still stays the same. You’re shifting around a bit. Your lifetime earnings, theoretically, stay the same.

Cameron Passmore: They stay the same. I'm just saying, there's not as much air left down the road if you shift forward by borrowing, consumption.

Ben Felix: Yeah, for sure. You're shifting forward your future consumption. That would be rational in many cases. If someone's constrained and they can't borrow for whatever reason, or they can't borrow enough, then they just wouldn't save. There are interpretations of — I've got a future episode on all this stuff. There's an interpretation of the life cycle model where young people should not save, because the utility loss is so great. That paper actually also argues that automatic enrolment into retirement savings plans is –

Cameron Passmore: Oh, man.

Ben Felix: - detrimental from a welfare perspective.

Cameron Passmore: Such a tease.

Ben Felix: For the same reason that I just described alluded to a minute ago. It happens slowly and then all of a sudden, for the same reason, by the time you find yourself in an undesirable situation, by prioritizing your present self over your future self, it ends up being more challenging to improve the situation, because you have less time available to compound. Between the exponential growth bias and hyperbolic temporal discounting, people are really fighting an uphill battle to treat future selves, as well as they treat their present selves. Which is, I think, for obvious reasons important when we're talking about spending and saving decisions.

There's one paper that I looked at that had modelling estimates, showing that eliminating these biases would meaningfully increase retirement savings, which might be just makes sense. The cost of spending today in terms of what those dollars could be worth in the future are often far more substantial than people realize. I think that's one of the things we talked to Scott Rieckens about. I don’t know if you remember that. We're talking about why the 4% rule was so revolutionary for him. It made him realize, if he spends $5 today, what that's actually costing him in terms of future consumption based on the 4% rule, something like that.

Cameron Passmore: Let's see, it's been whatever, $1,000 a month on a car, $12,000 a year. You need at least whatever, 20 to 25 times that in savings when you retire just to afford the car.

Ben Felix: That's the same math.

Cameron Passmore: It's just math, right? If you're spending 10,000 bucks a year on something, you need whatever. 200,000. Pick a number. $250,000 of capital to replace that.

Ben Felix: Now, the argument is not that all spending is bad, like I just talked about in some cases. From a utility perspective, people should not be saving, at least in some theoretical models.

Cameron Passmore: It's just about decision making. Helping make better decisions.

Ben Felix: Yeah, exactly. It also doesn't mean that people shouldn't save when they're young. Not necessarily. But that perceives trade off between spending now and saving for the future, because of the biases we talked about, systematically favours current spending over saving, and then that can cause real problems. I'll talk about how that maps to regret in a second. Understanding the exponential growth bias can mitigate it to a large extent.

If you go and do the financial math calculation and you see the ending value, or the ultimate result of whatever it is, the future value, or the present value, depending on the situation, or the rate of return, whatever the best comparison is, you can make that bias go away by seeing the result. Hyperbolic temporal discounting is trickier, because it's not a cognitive bias. You can't tell someone, “No, that's wrong. You're doing the math wrong.” Well, no. It's not math. I prefer my current self over my future self. This is the Hal Hershfield stuff, where we start talking about doing stuff, like writing a letter to your future self to build that connection, or looking at an aged picture of yourself. Some experiments have found that just thinking about the future can help with that bias.

Cameron Passmore: You and I just got a copy of Hal’s upcoming book; Your Future Self is the advanced release copy for review. Hal is going to be joining us in a couple of months on the podcast again. Returning guest. Do you ever think about choices you've made, or trade offs with respect to future, current consumption taken away from future consumption? Have you ever thought about that actively when you make a decision?

Ben Felix: Yeah, all the time. It kills me.

Cameron Passmore: Yeah, I remember my first one. This mall opened up in Sherbrooke, 1973. I was saving up money from my paper route, my worm business. I remember going to the Eton's. There's this downfield vest I was dying to get. I grew up in a pretty modest, economic environment. Fabulous growing up, but modest economically. Buying anything like that was a big deal. Growing up, I remember two purchases in all the years at home, like big purchases; a couch and a VCR. Those were the big events.

I just remember, always going as fast as I can get to – I don't remember how much it was, but I guess, much as savings, but give up the compounding if I buy this. Finally, I did buy it. It was one of the few things I did buy and I loved it, wore it all the time. It's pretty cool at age seven with this vest. I think it did lead to early on, realized there's this trade off that's going on when you do make a choice. Then I remember being at work a couple years later, I worked in a butcher shop, as many people know. I remember, someone that I worked with being so proud, he got approved for a car loan. I can't imagine what the loan rate was back then.

We'd go to the same bank branch, a small Royal Bank branch. He would go see the manager to get his loan approved, and I'd be going to get my deposit slip to put money in. That's when it hit me. I say, okay. Effectively now in today's terminology, his cost in capital was my expected return, because I was putting in 9.75% in savings bonds. He was borrowing on the other side at whatever rate. It's incredible how these events just stick out in my mind almost 50 years later.

Ben Felix: That is incredible. I said that I was going to map this back to regret. We do have Dan Pink, who's an author, who wrote an excellent book on regret, which we've talked about his book, because it was part of the finding and funding a good life paper and we actually did an episode on regret, too. This is a quote, or a paraphrase from Dan Pink, that regret gives us something, like a photographic negative of the good life. Thinking about what people tend to regret can be useful and thinking about what a good life contains. In his book on regret and also in the upcoming Rational Reminder episode that he's going to be on, he defines regret is related to our failures to be responsible, conscientious and prudent as foundation regrets.

Now, foundation regrets, often, but not always relate back to money. I mentioned earlier, some of the other cases where exponential effects matter that are not money related. Reading Dan's book, and maybe to qualify Dan's comments a little bit, he did two pretty substantial research projects of his own. In his book, he cites a lot of academic literature. He also did two large scale research projects, which he was careful to tell us were not really academic research projects. At least one of them wasn't. It was very subjective, or qualitative. He got this massive database of, I think, he's up to 18,000 at this point, regrets, like written regrets, where people typed out what they regret.

He was able to go through this. Then this is where he came up with the idea of foundation regrets by he classified all of the regrets that were submitted into four core regrets, that is what he called them. The premise of foundation regrets is that our lives require some basic level of stability. Sometimes our individual short-term choices over time end up undermining this long-term need. That's stuff like not saving enough, and then realizing later on that you don't have financial security. What Dan argues is that everyone in their lives, they require a basic infrastructure of education, financial and physical well being that reduces psychological uncertainty and frees time and mental energy to pursue opportunity and meaning. Pretty powerful.

Due to the effects of hyperbolic discounting and exponential growth bias, we often end up regretting not doing more things like saving, exercise and learning sooner. A lot of these regrets map, or follow this framework of, “I wish I had done more of X when I was younger. I wish I had done less of.” One that comes up a lot is drinking. Like, “I drank too much when I was younger and now I have all these problems.”

Cameron Passmore: The saving one is interesting, right? Because the less you're able to save, the more you really do need to save. Because if you can't afford to save, you can't afford therefore to stop working down the road.

Ben Felix: I mean, that's an interesting one, too. That paper that I mentioned earlier that argues that in some cases based on the life cycle hypothesis, some people don't need to save at all, their reasoning is that through Social Security and in Canada, Canada Pension Plan and old age security. For people with low incomes, the welfare losses from saving are large, because their income is low. The amount that they'll be able to save relative to their government pensions is small. Therefore, they shouldn't save at all. That's their argument in the paper.

Cameron Passmore: I buy that.

Ben Felix: That's a future topic, related to this. I keep coming back to it. I've got a whole other topic prepared on a lot of that stuff on like the – your cost of living, savings rate, budgeting, basic personal finance concepts or something. Anyway, that'll be for a couple of weeks from now.

Okay, so one of the big problems with foundation regrets is that they're difficult to avoid, because of the cognitive errors and biases. They are even more difficult to undo. If you wait too long to start saving, the biggest asset that you have on your side, which is compounding, just gone. You can't do anything about it. It's just gone. In the short run, people tend to regret their actions more than their inactions. In the long run, regrets based on inaction, like not saving, tend to dominate. That's just another interesting point to think about.

Once you understand how financial math works to evaluate the impact of financial decisions over time and once you understand the biases that can get in the way of that and thinking, at least intuitively, an important question that we alluded to earlier, because it being pretty difficult to answer is what assumptions you should be using to discount and compound? The assumptions can have a pretty significant impact on financial planning decisions and even asset allocation decisions, because of their long-term nature. You might have a different asset allocation if you expect an 8% equity risk premium, instead of a 2% equity risk premium. A small difference in the discount rate can have huge differences in long-term outcomes.

We, of course, post expected return assumptions that we use for this purpose. FP Canada and IQPF, also together, post a set of assumption guidelines that are overall fairly similar to ours. In general, stocks are expected to have higher returns than bonds. Bonds are expected to have higher returns than cash. You'd like to expect the bonds will have higher returns than inflation. We know from our episode with Scott Cederburg that in more cases than most people will be comfortable with, that doesn't work out. Although, there are inflation protected bonds now, except not in Canada anymore. They're going to go away. John Cochran wrote an article in The Globe and Mail about Canada scrapping real return bonds.

Cameron Passmore: Interesting.

Ben Felix: I don’t know. Somebody posted in the Rational Reminder community. That's expected returns. Step one, difficult to know which discount rate to use. In applying an expected return to a decision, In some cases, not all cases, but in some cases, you also have to incorporate inflation and taxes. Inflation, of course, is the increase in prices that tends to occur over time. In Canada, the Consumer Price Index, or CPI represents changes over time in the cost of a fixed basket of goods and services designed to be relevant to Canadian consumers.

Even in stable economies, like Canada in the US, central bank policies target low, but stable inflation. We expect the cost of the basket of goods to rise steadily over time. Even at low rates of annual inflation, we got to remember that compounding is an exponential function. If you do nothing with your money, your real rate of return, so your rate of return adjusted for inflation is going to be negative. If you have a $100 in the bank account earning, no interest and you leave it there for 20 years, well, inflation is 2% a year, your $100 in terms of purchasing power will decrease to about $67. It's a big deal. Clearly an issue for this concept of moving economic value forward through time.

Historically, in both Canada and the US, inflation has been about 3% per year on average. I used 2% on my example. Starting in the 90s, the central banks of some developed countries, including Canada started implementing inflation targets, which basically just means the central bank will try to keep inflation around their target. Then since they started doing that, inflation in Canada has been around 2% per year on average, although 2022 and 23 clearly saw inflation levels that had not been seen since before inflation targeting was put in place.

To take these effects into account, I'm not going to talk through the formula, because it's got more terms than the last one and we can post it though in the video, if people want to see what it looks like. You can't actually just add, or subtract inflation from your nominal return from your before inflation return. They have to be combined a slightly different way. It can have big impacts, like calculating the amount needed to retire, for example, using a real expected return. If you're taking your retirement cash flow needs, your future consumption liabilities, if you will, if you're taking those in nominal terms, meaning that they don't change over time, then you can go ahead and use a nominal discount rate. Of course, most people don't have nominal retirement liabilities. They have real liabilities. Or in other words, their nominal consumption will increase over time due to inflation.

In that case, you want to use a real discount rate. That can dramatically affect the amount that you need to save for retirement. If you've calculated your retirement saving need based on a nominal discount rate, you might be in trouble. That's inflation. Taxes also reduce the return on investments. In some cases, they also decrease your borrowing cost. In Canada, if you take a loan with the intention of earning investment income, the loan interest can be deducted from your income, which decreases your after-tax borrowing cost. Then likewise, in a taxable investment account, your after tax rate of return is going to be lower than your pre tax rate of return, which again, that can change decisions.

Cameron Passmore: Can I give you an example of inflation.

Ben Felix: Of course.

Cameron Passmore: It's a vivid example and one that people may have seen pictures of this online. Back to 1973, a new mall, as I said, opened and near the mall was our first McDonald's. We were a family of five and we would periodically go to McDonald's before going to the mall. This was a big night out for the family. I distinctly remember my father saying, we have $5 to spend on dinner for five of us, which you can't even imagine going anywhere for 5 bucks now. I found this old menu and is exactly the menu that we would see at McDonald's. I went and did the math, you can actually do it.

I remember, my father said, “But I've got to get the filet o fish, which was the most expensive thing on the menu.” We could get, I'm looking here, cheeseburger, 33 cents, hamburger, 28 cents. Shakes for 35 cents back then. We could do it. Five of us could go to McDonald's for 5 bucks back in 1973.

Ben Felix: Crazy.

Cameron Passmore: I have no idea what it would cost today. I'm guessing, at least eight times that for a family of five, I would think.

Ben Felix: Did you calculate the Big Mac inflation from that until now?

Cameron Passmore: I did not. Could go look –

Ben Felix: Interesting.

Cameron Passmore: We can do the math and come back next time.

Ben Felix: I have no idea how much a Big Mac costs today.

Cameron Passmore: I have no idea.

Ben Felix: Not a clue.

Cameron Passmore: Anyway, it's very cool. Very cool math. Anything else to add?

Ben Felix: No. That's again, trying to cover foundational topics on financial planning. That's a big one. We'll build on that next time, talking about the basic personal finance concepts, which largely feed off of financial math. As we talked about earlier, most financial decisions rely on financial math. We'll keep building from there. Building up the foundation.

Cameron Passmore: All right. Well, let's go to another foundational piece, which is about indexing. This one will take me longer than 60 seconds. However, I'll do my best. This goes back to thinking about the S&P 500 index, which started in 1926, the Dow Industrial Average in 1885. These were started, created to sell newspapers, if you can believe it. In 2012, these two companies merged. In episode 54, you and I got to go to New York City to sit down with Dr. David Blitzer, who was the chairman of the S&P Dow Jones Index Committee. We were at the epicentre of the index revolution, sitting, remember Ben, right in the actual room where the index composition decisions.

Ben Felix: That was nuts.

Cameron Passmore: That was nuts.

Ben Felix: I'm going to blow up your 60 seconds, but that was so crazy to be right in that building, right where the indexes are decided upon.

Cameron Passmore: The building. We were at the table for those indexes. It was pretty cool. Anyway, so that turned out to be an incredible indexing history lesson for us. When Dr. Blitzer started, the idea that you could invest in an index was a completely foreign idea. Then you move ahead to the whole ETF revolution starting in 1993 in the US and a bit earlier in Canada. The whole story is just wild, and he was at the epicentre of it all for so long.

We jumped into details about how the indexing industry actually works. How does the index provider, like S&P work with a product manufacturer, like Vanguard, for example? How does that work? S&P publishes the indices and they licensed the rights to use the index to manufacturers. He described in incredible detail how the committee decides on what is added, or removed from an index, and how does it not become an active portfolio? Can indexation become too big? Why pass was such a bad word to describe this. Phenomenal interview, episode 54. Highly recommended. It's timeless.

Ben Felix: Totally.

Cameron Passmore: All right, the book review, which is more like an essay review, but it's really cool. I went to the office last week to pick up stuff. As people know, we work mainly from home, as you do. There was a book there, holding it up, How to Live on 24 Hours s Day. It's from my good friend, Blair, who I met in London when I was there, and he thought I'd enjoy it. It came along with a note from him saying, “I thought you would appreciate this book. It’s personally had the most profound impact of anything I've read in my life so far.” It was pretty powerful. If you know Blair, even more so.

This is a 60-page, like I said, it's almost like an essay written in 1908. The English author, Arnold Bennett. According to Wikipedia, Bennett wrote more than 34 novels, 13 plays, articles for more than 100 newspapers, two dozen self-help books and journaled daily, over 1 million words. Incredible. This book is widely regarded as his most enduring work. How to Live on 24 Hours a Day is a 12-chapter book. It's about the treatment of time. We can use time for gaining more money. However, more money can't get you more time.

Yes, money might be able to buy you more free time, but we all, all of us get the same amount of time coming at us. Yes, we have different life expectancies, but the amount of time that you get every day is the same as what I get. What he says, “To live is what we're after and not simply to exist,” which is all too often the case. He says, that we can accomplish much more than our day's program, he calls it. Our job program.

He said, there's many books to show you how to live on X dollars per day, there's none that show you how to live on 24 hours per day. Out of 24 hours, you need to, and I'm quoting, “Spin health, pleasure, money, content, respect and the evolution of your immortal soul. You can waste the current time. However, more time just keeps on arriving. Each of us regardless of our personal situation, receives the same amount of new time.” He calls, “Hours our little pearls of our life.” Interesting. He says, “People work eight hours a day, they sleep eight hours a day. This leaves eight other hours to live.”

He challenged the notion that one is exhausted after work. After all, there was so much time after work to accomplish so much. So many people do nothing with their time after work, yet complain, they're wasting their lives. Therefore, this book offers up advice on how to improve your choices with your time to improve your life. He suggests, you should rise two hours earlier, and maybe retire in the evening a bit earlier. You accomplished as much in one hour in the morning, as you do in two hours in the evening. Do not waste your time that you're commuting. Concentrate. It gives a whole – I mean, it's not long. Of course, we talked about how just taking time to concentrate.

In the evening, since you're not tired, spend 90 minutes, three nights per week on the cultivation of your mind. The other nights, you can spend with friends. Spend time reflecting on problems over happiness, upon our direction, upon what life is giving us. Read more. However, Ben, not fiction, as that it's so much pleasure that it sweeps you away. Study something and learn. He's not opposed to fiction, but he’s saying, don't read fiction to expand your mind. Read it for pleasure.

Think about cause and effect. I just thought it was a really neat book. I think that's why Blair sent it to me, because we've talked about power of deep work and engagement, having purpose, getting into flow and all these challenges that people have with distraction to be able to do that. This book is a 114-years-old and still rings true. Highly recommend it. That's a good book to consider for your 23 23 challenge. Don't forget on the rationalreminder.ca site, there's a tab there to join the challenge. Still lots of time, and make sure you become friends of Ben and I on Beanstack.

Ben Felix: I have not been great about logging my reading in Beanstack.

Cameron Passmore: I've not been great on logging into the community, so we cannot do everything.

Ben Felix: Can't do everything. That book sounds incredible, given when it was written. Sometimes I think about that with – I don't want to get into a discussion about religion, but when you look at a lot of practices promoted by religions, a lot of them are related to stuff like what he's talking about. I always found that to be quite interesting. Because a lot of religions date back quite far in history. A lot of the suggestions for how to live your life are based on somewhat similar principles.

Cameron Passmore: Fascinating.

Ben Felix: I don't know if that's true for all religions, but for some, it is for sure.

Cameron Passmore: To the after show. We finally finished the series Animal Kingdom. Wow, I didn't realize. I thought we were still waiting for Series 6. It was on iTunes. Unbelievable finale. This is one of those shows where I was sad that it's over, because it was so good to watch. Kind of like Breaking Bad. Oh, you'll never see Breaking Bad for the first time again. Well, you'll never see Animal Kingdom.

Ben Felix: That show is incredible. My wife and I, when we’re looking for something to watch, we still talk about how nothing's going to be as good as Animal Kingdom.

Cameron Passmore: Oh, that finale was wild. Recent reviews. We got one from Dushkick in Sweden. “The best investment podcast. Far better than any other podcast with this thematic” Very kind. Speaking of 23 and 23, long-time friend and listener, Bruce, reached out to me last week and he said, he's been inspired to read more. He shattered the 22 and 22 challenge and he read 40 books. He is enjoying the Goodreads app, which is the Amazon app that we have talked about.

Also, heard from Peter from Canada on LinkedIn. Reached out to recommend the book, How Brands Grow, based on us talking about the marketing book two weeks ago, by Byron Sharp and he said that Byron Sharp is the Gene Fama of marketing. Then I also heard from Timothy from Arlington and Virginia, who thanks us for, “The abundance of information each episode provides.”

Ben Felix: Nice. In the Rational Reminder community, lots of good discussion happening over there. But G Davey, wanted to thank the RR team, so I thought that was worth reading on the podcast. They said, “I will make this brief, but it shouldn't go unsaid. Thank you to the whole Rational Reminder team, the podcast, your papers and this message board have made me a much better financial advisor. Your ability to absorb the literature and organize it in a way that is accessible and useful to me and my clients is unsurpassed. I was already a student of the literature, but you've taken me light years beyond where I was. Thank you for making this happen.” Very nice.

Cameron Passmore: There's a lot of advisors that listen, I think. I know. I hear it from a lot of them. It's nice to hear.

Ben Felix: I'd love to have data on that. I guess, we could do a survey. I'd love to have real comprehensive data, though, as opposed to survey data, because we get that question from guests a lot. Who's your audience? We're like, well, we know from people that tell us that some people who are do-it-yourself investors listen and some people who are academics listen. We've been surprised a few times that someone that comes on as a guest tells us that they listen, or someone that applies for the community uses their university email address, it's like, “Whoa. You're in here.” Love to have actual data on how that breaks down.

We mentioned a couple weeks ago that we've been able to plug in in the community that allows people to subscribe to financially support the community. It's a subscription plugin. We're not selling anything, though. It's just like, if you want to support the community, you can do that now. There's a button up at the top that just says, support the community. We rolled that feature out, because the hosting costs, which are based on the number of page-views in the community rise at an exponential rate. The activity in the community has been – it just keeps going up.

We had to upgrade, I don't know what it was a while ago, and the price doubled then. We're getting closer and closer to the next tier. The price for the next tier says, ‘Contact us,’ which makes me nervous. We've had nine people sign up to support the community, for which we are very grateful. If people are enjoying the community, then supporting it is great.

Cameron Passmore: Meetups coming up. We forgot to mention this two weeks ago. Ottawa, we’ll be meeting on the evening of March 21st. If you're listening, you want to come out. We're not sure the time, but something like, I don't know 5 to 9, or 6 to 8, but it'll be the evening of March 21st in Ottawa. Then March 28th in Montreal. If you're interested, email info@rationalreminder.ca. Just a casual meetup. Come if you can, as long as you can; similar to what we did in London.

Ben Felix: Where we're just going to have some snacks or something?

Cameron Passmore: There had to be some snacks.

Ben Felix: Talk about the time value of money. Talk about factor premiums.

Cameron Passmore: Based on the London meetup, it's incredible what you talked about. Yeah, that was so much fun. People we met were great. In the store for the month of February, we get a bit of a feature, while supplies last. According to Jackie, there's 40 left. Every order during the month of February until there is supply runs out. Every order, will get a free took. That means you get a free took, get a free pair of socks and a free koozie. We’re giving away the store. We just want to get the stuff out there. We have these extra tools. I want to get them out. It's February. Let's get them out. Place your order before February and you don't have to mention anything. Jackie knows. She'll give you a free took.

Also, don't forget that if you're an educator, or a teacher and you'd like to use some Talking Sense cards in your class environment, send us a note again, info@rationalreminder.ca. We'll get you a deck of cards for free. We had Jacob, who was a math teacher reached out. We sent a deck out to, and then at least a school here near where we live, she's going to be getting a deck for one of her teachers in school.

Ben Felix: Nice.

Cameron Passmore: Went night skiing last night, James and I.

Ben Felix: It was perfect. Perfect.

Cameron Passmore: Minus seven. Lots of snow. A blast.

Ben Felix: Yeah, it's awesome. We went and done that once. This season, I should try and do it again before things close down. I think you can buy equipment, I think, for next year, because it's a real hassle to rent.

Cameron Passmore: You can rent in your size for boots?

Ben Felix: Surprisingly enough. I assumed, no. but my kids were in ski lessons and when we were in the rental shop, I just asked the guy, “Do you by chance have any boots of feminine?” He's like, “Actually, we do have one pair that we keep for large people such as yourself.” I tried them on, they fit. I've skied in them three times. If they're great, it's fine.

Cameron Passmore: Are you willing to disclose your shoe size?

Ben Felix: Oh, yeah. I don't mind. My shoe size is 17. These boots are 15s, but I think they're super worn out inside, so makes them look bigger. I feel fine, though. They're not uncomfortable. I think, I'll try and buy equipment for next season.

Cameron Passmore: Rentals get expensive. It’s always a pain to get in the time and the hassle.

Ben Felix: Yeah, that's true. That's more than determine it for me. You have to order it ahead, too.

Cameron Passmore: Yes. We went last night, and we had the RFID cards and our jackets already for this hill. Just pay online and you just walk in. It's fantastic service and just work so well.

Ben Felix: Yea. I can do the same thing for the past, but I have to go into the rental shop. The other thing is doing it ahead of time is just tricky, because with young kids and stuff, it's not super predictable, when you're going to have time available. I did also want to mention that I'm doing a webinar on February 23rd for TD Direct Investing. They do these educational webinars. The way that they set it up, I didn't ask them why they do it this way. It's an interesting format. We pre-recorded an interview, which I did already earlier this week.

We pre-recorded an interview. It's a discussion about five-factor investing and why people would invest that way. We talked about some of the theory, some of the data, stuff like that. It's like a discussion about the five-factor investing with ETFs paper, basically. Then I watched the interview with all the participants that are there for the thing, for the event and then I'm there for a live discussion.

Cameron Passmore: On the 23rd.

Ben Felix: They play a pre-recorded interview with me, which I also watch. Then when that's over, there's a live Q&A discussion. That was an interesting format. February 23rd at 1 p.m., there's a link to sign up. We can put the link in the show notes.

Cameron Passmore: Yeah, you can see why I think it's a great idea. They got good quality content and don't run the risk of any technology blowing up on them. Or if you're sick, or something, or –

Ben Felix: Yeah, technology.

Cameron Passmore: Compliance.

Ben Felix: I guess, with compliance, too, probably. For a place like TD, it would make sense.

Cameron Passmore: In case you go rogue, or something.

Ben Felix: Yeah. I don't think I would, but you never know. Somebody else might.

Cameron Passmore: Before we hit the record button, you were talking about free throw shots, when you're playing basketball, and the practice that three-point shots.

Ben Felix: Three-point shots. You want me to just talk about it?

Cameron Passmore: It was a cool story. How you improved by trying to run up this leaderboard.

Ben Felix: Well, we started talking about this, because we were talking about our experience in financial services sales early on in our careers, and how there was always this leaderboard, and you had to try and work your way up the leaderboard, hitting your sales targets or whatever. You're always competing with the person above you to move up in the chart.

Cameron Passmore: The people at top 10 for revenue generation were the top of the leaderboard. They were deemed to be the best people in the company.

Ben Felix: Yeah, yeah. You get all sorts of privileges, and you get to go to events and whatever, whatever. You're talking about that and we were talking about the weird incentives that creates. But then, I brought up the basketball thing, because those incentives do something, even if it doesn't incentivize the right behaviour, in the case of financial product sales. In basketball, there was a similar leaderboard in the locker room. Every day, you had to challenge the person above you. I think you could challenge people more than one spot above you, too. You challenge the person above you, at least. If you beat them, you move up. You take their spot on this board.

With the board similar to the insurance stuff. You get all these benefits. You're allowed to shoot in games, or whatever, or you won't get in trouble for shooting in games. Or you're allowed to take shots in practice that other people aren't allowed to take, stuff like that. That competitive structure did create incentives that in basketball worked really well, because that team is known for being exceptionally good at shooting. The people at the top of the board who are allowed to shoot whenever they want, they're the best shooters on the team by definition. Like through, I don't know, some sort of market efficiency mechanism. It's applying that to work, where you're incentivizing people to do behaviour that we could probably argue not good for them, or for the customer. It's just a whole different situation.

Cameron Passmore: I can't imagine how many shots you must have done to stay at the top of that leaderboard.

Ben Felix: Yeah. You had to do a lot of shots, for sure. It's part of basketball. You shoot a lot of shots. If you didn't want to be a shooter, you still had to do your one challenge per day. Someone that wanted to move up the leaderboard would challenge you, because you could challenge more than one person, if I remember correctly. You can shoot shots outside of that, too.

Cameron Passmore: Amazing. Very cool story. You can connect with us, as always. We're both on Twitter. Although, Ben, I know you're not terribly active, but you do follow. You can follow our YouTube channel, of course. Rational Reminder is on Instagram and quite active over there. I love hearing from people on LinkedIn. Feel free to connect and drop me a note.

Ben Felix: I don't like any of those places. You know, what we don't maybe say enough is that if people want to chat, or discuss topics related to what we talk about in the podcast, the Rational Reminder community is a pretty cool spot. There's a ton of really, really good, high-quality discussion in there. It's really well moderated. We have a great team of moderators. Great team of volunteer moderators. We mentioned in the last episode that we're looking for moderators. We filled, by the time this episode comes out, we will have announced the two new moderators. Welcome to them. That's all very exciting.

We have a great team of volunteer moderators who are hardcore community users, who are super into all of these topics. The moderation is really well executed. Then we also have some PWL administration to make sure that everything stays aboveboard from a compliance perspective. It's just a whole different level, compared to, I think, what you can find. On the open Internet, if people want to have meaningful conversations, it's better than Twitter in my opinion.

Cameron Passmore: Twitter I like now, because I've cleaned up my followings and followers; following, people that I follow. Now they've got the following column set up. I think that's improved it for me. I love LinkedIn. There's a lot of good commentary going on in there.

Ben Felix: There is? About what?

Cameron Passmore: All kinds of stuff. I just like to see what people comment. Someone I connected with this, is hopefully an upcoming guest, made a comment on our podcast today. That's a good example. I think that's interesting.

Ben Felix: All right. Not a fan.

Cameron Passmore: I know you’re not. Okay, anything else this week?

Ben Felix: Nope. Be interested in feedback from people on the – this is now our third fundamental topic, or we're taking a slightly different direction than what we would normally talk about. I'll give you an example. The topic that I have not prepared, because of we're doing these more basic ones, is on covered call investing. Be interested to hear what people think about financial math in the way that we covered it, versus covered call investing with like an equity index with covered calls, which we can still cover at some point. That’d be interesting in what people think about. The opportunity cost of covering financial math, instead of covered calls.

Cameron Passmore: We'll see if my quaint stories get roasted or not in the community. We'll see.

Ben Felix: You won’t get roasted. People will love your stories. I still want to do the covered call one, because I think it's a question that's very persistent. I've gotten that question ever since I started doing YouTube videos. Can you do an episode on covered calls? I’m like, “What?” A random question. Then people keep asking over time. Okay, well, we guess, I'll do it eventually. There's some interesting research on it.

The other one that I'm going to do for the Common Sense Investing YouTube channel is on international diversification. We can bring that over to Rational Reminder, too, once done, but that'll, I think, fit into our fundamentals theme.

Cameron Passmore: Awesome. All right, as always, everybody, thanks for listening.

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