When wealth is not yet real

A newsletter about the psychology of everything. But mostly about money.

<<First Name>>, you live a rich life.

Welcome to the weekly newsletter where I share my learnings from the worlds of psychology, investing, and personal finance. Curated by Oz Chen.

Disclaimer: The following is not intended as investment advice.

🦄 When wealth is not yet real
Headlines like Jeff Bezos Just Made $3 billion in 20 minutes and Elon Musk loses $30 billion misrepresent the mechanics of wealth. Net worth measured in fluctuating stock prices is paper wealth. Until those assets are sold, literally realized, then no money has been made yet.

Many investors threw darts at the market (anything from Dogecoin to Tesla) in the past year and landed on bullseyes. One of the dangers of quick investing success is adjusting to a false sense of wealth.

Let's say someone's risky portfolio increased dramatically to $1 million. What happens if this person starts spending like a millionaire—and then their portfolio craters? I propose using this psychological buffer: "My portfolio is worth a million dollars at this point in time. This could change any time until I take profits and pay taxes."

Not to rain on anyone's parade—the recent wealth being created is something to feel optimistic about, especially coming out of the pandemic. Which brings us to this week's medley...

Money medley: mental models, markets and musings

🆙 Almost half of American consumers think their finances will be better next year.
A recent Chase survey found that Black and Latinx respondents—the hardest impacted groups from the pandemic—are more optimistic about their finances this year, even more so than the general population. Part of this optimism comes from improved savings and spending habits.

My prediction is that the hardest hit will continue being financially conservative, which contrasts against the YOLO attitude of affluent consumers. But it's reassuring when Warren Buffett says that America is going to be OK.

🇺🇸 The American Buffett
If it's one person that's optimistic about the U.S., it's Warren Buffett. A data scientist performed a sentiment analysis on Buffett’s shareholder letters from 1977 to 2016, and found the vast majority of them to be optimistic. Words like outstanding and extraordinary were used, while only 5 annual letters (hello 2008) mentioned negative words like bad, unusual, difficult.

In a recent Berkshire Hathaway shareholder meeting, Buffett said this about the recovery: “Nothing can basically stop America...we faced tougher problems, and the American miracle, the American magic has always prevailed, and it will do so again.”

If you've bet on America for the past 70 years like Buffett has (and won big), then that optimism feels warranted. But how do we know when optimism is overblown?

🧠 The optimism bias
This is the cognitive bias that we believe that we're less likely to experience a negative event compared to others.

The investing book Trading for a Living observes that most traders think they're less exposed to potential losses than others, when in fact “Markets are actually set up so that most traders must lose money.”

On the other hand, I also believe that investing is an act of optimism. No one puts money where they don't think it stands to grow, lest you just shove it underneath the mattress. Other than striving to be just above average, what level of optimism is healthy?

⚖️ The optimist-pessimist spectrum
Morgan Housel will tell you exactly what kind of optimist or pessimist you are. The 16 levels of his scale, including everyone from "probabilists" to cynics, feel pretty relatable. As usual with most tests, I land somewhere in the middle:

"In the middle we have what I call reasonable optimists: those who acknowledge that history is a constant chain of problems and disappointments and setbacks, but who remain optimistic because they know setbacks don’t prevent eventual progress. They sound like hypocrites and flip-floppers, but often they’re just looking further ahead than other people."

Where do you fall on the spectrum? Reply to let me know.

💸 Money tip: get a travel-friendly debit card
I'm typing this from Cabo and contributing to the post-pandemic travel boom. If you're going abroad, then avoid the tourist trap of currency exchange kiosks. If it's 20 pesos to $1 USD in Mexico, these kiosks make money by giving you less, e.g. $18 pesos per dollar.

To skip this nonsense, I use the Schwab debit card that doesn't charge ATM fees nor foreign exchange fees. Here's how I use it:

Land at destination airport, skip past the exchange kiosks, exit to airport waiting areas where there are local ATMs.
Choose an ATM that seems more trustworthy, e.g. big bank from that country (Banamex in Mexico) or international bank (HSBC). It shouldn't matter but it's an extra level of security.
Put in debit card, and cash withdraw in the local currency, e.g. pesos in Mexico
Get any foreign exchange fees and ATM fees refunded

While I only really use this account when traveling, this debit card can be used to refund ATM fees everywhere. According to Schwab's FAQ: "We refund ATM fees for cash withdrawals using your Schwab Bank Visa Platinum Debit Card wherever it is accepted at the end of the same month that you used your Schwab Bank Visa Platinum Debit Card."

Instead of hunting for the best rates at various exchange kiosks, the exchange rate you get using your Schwab card will have the most updated bank rates for the day you make the cash withdrawal.

Here's my friend referral link if you need a good travel debit card & bank account. You'll also get a $100-$500 account opening bonus depending on how much money you deposit.

If you click on my link, you'll want to select "Open an account button," and on the next page scroll down select "Schwab Bank High Yield Investor Checking—Account linked to Brokerage Account." It's a mouthful.

Just for fun: Einstein, do you believe in God?

WRITTEN BY OZ
The most important thing I learned as an Econ major is that money is more about behavior than numbers. Today, I design banking products at a fintech company. I believe that mental models beat financial models, and that wealth is really out an outcome of mindset.

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Please just treat my content as entertainment. My content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.