“You can’t lose money on real estate”.
“The stock market increases over time.”
“Build a better mouse trap and the world will beat a path to your door.”
“All rich people made their money with leverage.”
“It’s more lucrative to be self-employed then an employee.”
The world is a confusing place. Apparently the last person who was felt to “understand all human knowledge” was Francis Bacon (I couldn’t find a source for this – if I have the wrong guy please correct me). During his lifetime (he died in 1626) he was able to stay current on advances of all the sciences and follow every new discovery. Since his time, the amount of knowledge in the world has exploded (apparently doubling every 16 years or so) to the point where it would be impossible for any one person to follow all the discoveries in one large field, let alone multiple (which has pushed for ever increasing specialization). This bothers people.
A few days ago I got some comments from a Rich Dad, Poor Dad follower who took exception to my Rich Dad, Poor Dad review of “the bible”. I tried to answer his question, but quickly gave up as I could tell he was stuck in that candy-sweet intellectual quagmire that is absolutism.
I did a science fair presentation when I was a kid, and my project was on insulation. I’d blown up a plastic bag, labeled it “Air” and had put it up on a board (air is a fairly decent insulator). Another kid walked by and asked how I’d filled the bag. “I blew in it” I responded, to which he sneered “then it’s not air, it’s carbon dioxide” and walked away. Clearly our young Darwin had learned that we consume oxygen when we respire and produce carbon dioxide (as a waste product). He took this as an absolute (so air must be 100% oxygen when I inhale, and 100% CO2 when I exhale) and proceeded to share his insights with those around him. The nuance to this concept is that we’re not perfectly efficient (by any means) and air is not a homogeneous gas (if you want to experience a different type of air, go to a Chili cook-off in an enclosed space). In grade 3 we learn “people breathe in oxygen and breathe out carbon dioxide”. In grade 7 we learn “people breathe in air, and breath out air with a lower proportion of oxygen and a high proportion of carbon dioxide”. Further on we learn the process in ever increasing detail including a related (and basically opposite) process in plants, how this relates to metabolism as a whole, and other biological waste products. You can go as far down this rabbit hole as you want.
I’ve always remembered this experience for two cliches. “A little knowledge is dangerous” and “blindly following information can be dangerous”.
A case could be made for any of the lead-in statements that began this post. Cases could be just as easily made against each of them. Where does this leave us? Is it impossible to know anything? How does one learn or make decisions?
My approach to acquiring new knowledge is to accept generalities for what they are, but to be open to understanding clarifications. My understanding of the stock market has evolved from “It goes up over time” to “It goes up over time, with cyclical fluctuations” to “It goes up over time, with cyclical fluctuations, but its very hard to predict where we are in a cycle”, to “It goes up over time, with cyclical fluctuations, but it’s very hard to predict where we are in a cycle, but the woman who wrote Juggling Dynamite thinks she can predict where we are in cycles, but a lot of people seem to disagree with her, so I should really look into this further before I base any important decisions on timing market fluctuations”. It’d sure be a lot easier to just live life (and invest!) according to the idea “it goes up over time”, eh?
Obviously if you accept that you never have complete knowledge on any subject (and you don’t. Accept this) you have three choices: 1) Become paralyzed and do nothing, 2) Do the best you can with the level of understanding you have and 3) Try to learn more.
Numerical analysis of stock seems quite complicated, and a good case has been made that prices already reflect this (and other valuation criteria) so I’m in position #1 with regards to this. I don’t even try to determine a “fair price” for a stock and whether or not its selling at a premium. I’d like to be able to go bargain hunting, finding undervalued stocks and buying them, then selling them once they’re over valued and laugh all the way to the bank but I don’t see how to get from where I am currently to this point (if it is even possible). I’ve therefore given up on trying to personally appraise stocks.
When I bought my condo, MANY people had a FAR greater understanding of real estate investing and the Toronto market then I did (and MANY still do). I was in position #2 when I made the purchase and still am as I make other decisions concerning it. If I had waited to achieve “perfect knowledge” I never would have bought, but if I’d bought without investigating the subject at all, I would have been putting BIG money into something I was very ignorant about (not a good scenario).
I’m quite interested in buying an apartment building at some point in the future, but am nervous about acquiring such an expensive piece of property with my current level of knowledge. Therefore I’m trying to pump Q from one million to my name for any information about his experience buying a building, talking to my real estate friend about his experience, and keeping my eyes open for good books on the subject (position #3).
Some people get stuck in position #2. Rather then trying to learn more about the subject, they attack people who disagree with them. The fallacy with this approach is that the universe doesn’t change how it operates because you won an argument (unless you believe that we have a subjective universe based on a consensus perspective, in which case this might be a good approach to life). Running around brow-beating people into agreeing with you that your approach is without flaw and guaranteed to make you rich, successful and attractive to the opposite sex isn’t productive or effective. The joke is that it makes position #3 harder to achieve as the people who might have been willing to enlighten you probably won’t want to talk to you any more.
Thank you to all my readers (and especially those who leave comments or write me e-mails). My every interaction with you puts me into position #3 and makes me a better person. Those who challenge me and get me to look at things from a new perspective (like Mike and Q’s responses to my income post that didn’t include taxes, Money Gardner and Mike’s clarifications of my living expenses in my about section, Jason’s inspiration of this post and Quietrose’s off-line challenge that I was spending more on food then I needed to): Thank you, thank you, thank you! You’re my own chorus of personal Jesus Christs!
Those poor Christians who only get one!
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