Expected Value in Decision Making

I’m reading the book ‘DUCY? Exploits, Advice, and Ideas of the Renowned Strategist’ by poker player David Sklansky and he does a great job explaining a critical concept in decision making that you need to add to your list of mental models: Expected Value (EV) 

“Expected value arises most frequently when you must make financial decisions about uncertain outcomes. However, it’s also useful for other types of decisions if you can convert the alternatives to numerical values. 

If you don’t convert, you may be unable to compare two or more uncertain possibilities. But when you see EV, you convert your decision into a comparison between specific numbers, and then usually, but not always, select the alternative with the highest EV. 

…Suppose I tell you, “I will give you $120 if you take this die and roll a three.” That’s nice of me, but exactly how nice is it? Hopefully you will see that I am as nice as a person who hands you a $20 bill. 

That’s the EV of my offer. If I let you roll six times, you would have gotten (on average) my gift of $120 the one time that you rolled the three. Since it takes (on average) six times to get $120, each roll was worth an average of $20 to you.” 

I highly recommend reading the article ‘EV: Millionaire’s Math’ by Billy Murphy of ForeverJobless.com. I learned about Billy 7 years ago the Mad Fientist’s podcast and his article is one of the best in-depth explanations of the EV concept. 

I believe understanding EV can make your decision-making capabilities significantly better. In short, this is worth your time to understand! 

Tax Benefits of ETFs

We often get asked about the differences between mutual funds and ETFs, and I usually send people to an article like this one on Investopedia that show there are some minor differences (you can sell ETFs during the day similar to a stock, but a mutual price sale settles at the end of that trading day), but they are minor and not really worth being bothered by. 

I did just come across an article from the Financial Times entitled, ‘US ETF investors mainly motivated by tax loophole, study shows” that presented something I was unaware of: 

“When mutual fund investors want to redeem their units, the fund sells a slice of its underlying holdings in a “cash” transaction. If these holdings have appreciated since the fund purchased them, a capital gains tax liability is triggered for the fund and all of its investors, even those who are not redeeming. This liability can also be triggered whenever the fund manager makes changes to the underlying portfolio. 

In contrast, when faced with redemption requests, ETFs do not usually need to sell their underlying securities…As a result, the trading activity, and any resultant capital gain, occurs outside the fund so there is no pass-through to the end-investor. 

This can make a significant difference. Last year some mutual funds managed by the likes of Columbia Threadneedle, Invesco, JPMorgan and T Rowe Price made capital gains tax distributions equivalent to double-digit percentages of their net assets, with some as high as 30 percent, according to Morningstar. 

By avoiding the distribution of realised capital gains, the average ETF has had a tax burden 0.92 percentage points lower than that of the typical mutual fund over the past five years.” 

I suspect this will be a lot less impactful for low-cost Total Stock Market and S&P 500 index fund investors than these actively managed funds, but it is still something to consider and interesting knowledge for all of us. 

Meditation I Recommend

I just listened to Episode 2 of the Huberman Lab podcast with Stanford neuroscientist Andrew Huberman entitled, “Master Your Sleep & Be More Alert When Awake.” This is a 300-level masterclass on optimizing sleep and it was really cool when he featured the EXACT 10-minute yoga nidra meditation I’ve been listening to daily for the past year. I’m refreshed to the point that it feels like I took an hour nap! Highly recommend checking this out: 

ChooseFI Community Taking Action This Week

• Charlie said, “We woke up one morning to find that our TV panel had inexplicably died. After researching for a few days, I picked out our new 65" TV for $2,200, and was one click away from purchasing it from Best Buy. For some reason I paused and thought about our FI goals, and decided to at least do a quick google search to see if I could find a local TV repair shop. I ended up finding a repair shop 30 minutes away and got our TV fixed for $250. We used the nearly $2,000 in savings to boost our savings account.” 
• Jeff said, “For my wife and I, our life improvement this week was spending part of Valentine's day discussing our goals and aspirations for when we retire. We have begun documenting those ideas to help us prepare for the next stage of our life.” 
• Dennison said, “I was doing massage therapy right around the time lockdown happened last March. After being furloughed, I immediately took the opportunity and pivoted to Salesforce after listening to ChooseFI talk about it, and last month I started my first Salesforce position making $70K right out the gate, more than double what I was making before. I'm super happy making the switch. Keep doing what you're doing. This podcast has changed my life all for the better.” 
• Hollie said, “This past week we opened an M1 spend account and transferred our emergency fund from our non-interest-bearing savings account to be invested. I figured out how to fit 1 more student in my preschool class next year, thus increasing my monthly tuition/income by $150 per month. We even traded leftovers with my son and daughter-in-law so we both got new lunch meals for the week! I went to the thrift store on the last day before they were closing to get new carpets so everything was 75% off the thrift store price. I was able to pick up some awesome clothes for my grandkids. Plus, I was able to get the first Covid vaccine. Such a great week of wins for us.” 
• Azar said, “At 39, I finally am in a position to start funding my Roth IRA. I just recently set up auto investments of $500/month. While I won't be FI any time soon, I am taking steps in the right direction thanks to what I've learned from the ChooseFI podcast.”

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