Sunday, July 23, 2017

Survivorship Bias and MLM's



XKCD.com

I've been thinking a lot lately about survivorship bias and how it can cloud our judgment in evaluating financial opportunities.

We are guilty of survivorship bias when we see someone being successful and think that all we have to do is do whatever they did to reasonably expect the same results. What this way of thinking ignores is that in most cases MANY other people have done some of the exact same things and yet haven't had nearly the same success.

Survivorship Bias Unpacked


For example, If we were to stage a competition of flipping coins where you advance to the next round simply by flipping heads, you would expect to lose about 50% of coin flippers in each round. If you start with 1,024 contestants, you'd expect the number of participants in each round to be roughly:

1,024 -> 512 -> 256 -> 128 -> 64 -> 32 -> 16 -> 8 -> 4 -> 2 -> 1

So after 10 rounds, you'd expect to only have one person left. Is he/she the best coin flipper in the world? How else is it possible that they flipped heads 10 times in a row! We need to interview them and have them give motivational speeches and buy their books, etc.

Seems pretty ridiculous, right? Except we do it all the time when we prop up legendary investors, the 19-year-old in California who won the lottery twice in one week, or those rare few individuals who achieve some degree of financial success with a multi-level marketing company.

What we miss in all of this thinking is that there were 1,023 other people who did the exact same thing and didn't get the same result. We admire the sole survivor, yet ignore the existence of the other competitors. Nassim Taleb has written extensively about this and related topics in his book Black Swan but you really can't go wrong with reading any of his books.

MLM Survivorship Bias


It's the MLM's that really get me with this. You know how this works by now. You get a Facebook friend request from someone you haven't heard from in years and accept it thinking "oh, I wonder what they've been up to". After accepting, you check out their profile and quickly notice that they're involved in Rodan & Fields, or Beachbody, or Lipsense, or Isagenix, or Herbalife, or Essential Oils, or whatever else they dream up next. Now that you're 'friends' they've got a great 'opportunity' for you to 'be your own boss' and generate 'passive income'. They make it sound so easy and they all seem to project an air of success, following the 'fake it 'til you make it' strategy.

This got under my skin recently when a friend of a friend went all over social media touting all the success she's had selling makeup through an MLM. She's reached a new level and qualified for a free trip to a resort in Costa Rica. Good for her. She's just doing her job, and so is the company. She gets a nice trip, and now probably dozens of people see what she's doing and now want to get in.

For every success story you see in any MLM, there are literally thousands of failure stories you'll never hear about. If you've got Netflix, I recommend watching Betting on Zero. I'm glad that this is helping get the issue out there, but I'm not sure these pyramid scheme type of companies will ever go away. The lure of a simple path to wealth and riches is too appealing, even if too good to be true. There is no simple or fast way to wealth. It requires hard work and time.

Wednesday, July 5, 2017

June 2017 Net Worth Update

I'm just getting back from a nice quick trip for the 4th of July and wanted to provide an update on our net worth. June was an expensive month for us in the DIY$ household. Nonetheless, we managed to still grow our net worth by $3,900 to $668,176.

June 2017 Net Worth Details



Cash


Our cash balance crept up this month but should jump more in July. We finished installing a backyard fence and had multiple trips that had me on planes for 27 hours in the month. Side note, it's REALLY expensive to rent cars now that we need vehicles that can hold 4 car seats/booster seats.

I even added another stamp to my passport by visiting Santiago Chile for the first time. The best part of the trip was that my 6-year old son was able to join me. While on that trip, I almost had a disaster when I realized mid-flight that I still didn't have a replacement debit card from when our accounts were hacked. Thankfully I did have some cash to convert and I made to sure to use credit cards everywhere I could and it worked out. Travel and home projects for July should be much lighter.

Investments


The S&P 500 returned 0.48% in June and we continued to stay the course. We continue to add 15% of my income to my 401k and are primarily invested in S&P 500 index funds. The only sort of exciting thing here is that our liquid assets are about to surpass $400k.

Cars


Our car values supposedly went up this month, but the overall trend still is down. I am a little bit nervous that one of our vehicles might die soon, but the fear is ungrounded. Both cars are doing great just getting old. What's the longest you've heard a Corolla lasting? I drove my mom's Suburban the other day and she's at 210,000 miles.

House/Mortgage


Yet again, we paid extra on our mortgage but not nearly as much as we'd like to do. Once our cash builds up a little more we'll start making much larger payments. For the first few years in this house, most of our home improvement projects were on the inside of the house. In the past year, we've shifted our focus to the exterior of the home. In June, we finished installation of a new aluminum fence.

We live on just under two acres but fenced in an area large enough for the kids to play in, but small enough to be relatively easy to manage. The next step was to tear down our deck. Rather than rebuild the deck, we'll be pouring a concrete slab with some steps down to it from the house. Once that's done, we'll be focusing on the grass and possibly starting a garden. It's going to be a lot of work, but surprisingly it feels less intimidating now that we've fenced in the area we'll be focusing on beautifying.



Here you can see part of the new fence and the area the deck used to be

Overall, it's been a good start to the year for us and I'm optimistic that we can reach our net worth goal before the end of this year. I'll leave you with another view on our progress so far this year.