2021-03-10_Jacob_Lund_Fisker_Interview
00:00:00.000 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:04.600 | skills, insight, and encouragement you need to live a rich and meaningful life now, while
00:00:09.120 | building a plan for financial freedom in 10 years or less.
00:00:12.920 | Today I am excited to welcome back to Radical Personal Finance, Jacob Lund Fisker, host
00:00:19.520 | or I guess I should say author of one of my favorite books on financial freedom called
00:00:24.760 | Early Retirement Extreme, author of the blog by the same title.
00:00:28.560 | Jacob, welcome back to Radical Personal Finance.
00:00:30.800 | Yeah, thank you very much.
00:00:32.240 | I mean, it's been what, six years, seven?
00:00:34.800 | It's been a long time.
00:00:37.160 | Last time we had an epic three-hour podcast that for quite a while was the most listened
00:00:43.280 | to episode of my show, and we really had a great time.
00:00:47.480 | It's been now how many years since you retired?
00:00:50.840 | Well, first time or second time around.
00:00:54.320 | I mean, I don't really think of it as retired per se, more like the option to do what I
00:01:00.680 | want whenever I want, whatever reason, right?
00:01:04.600 | But I mean, I retired, I stopped with my physics career in 2009, and then I had a stint in
00:01:12.640 | high finance, Wall Street kind of stuff between 2012 and 2015.
00:01:18.240 | So I guess technically it's been five years.
00:01:21.240 | So about five years since you left the world of finance.
00:01:26.000 | So what I'd like to begin our conversation with today is just simply to ask you a little
00:01:33.160 | bit about how you view your personal financial philosophy and the path that you've taken
00:01:41.440 | with the benefit of hindsight.
00:01:43.680 | Do you continue to feel satisfied with the path that you've taken with your life and
00:01:49.620 | your career, the early retirement extreme lifestyle so far?
00:01:53.840 | Yeah, I mean, I think it's working pretty well.
00:01:57.640 | I mean, it's sort of currently being cast within the framework of fire, but to me, as
00:02:03.600 | a financial independence retired early, but I never really saw those two things as the
00:02:07.840 | main characteristics of my philosophy per se.
00:02:13.120 | I mean, financial independence was more of a side effect that just followed from the
00:02:18.640 | way I was otherwise living.
00:02:21.400 | So I'd say in contrast to what it has sort of become, it was not really a milestone for
00:02:26.520 | me as much as just a checkbox as in like, "Hey, now I can do this.
00:02:31.600 | I have these options now that I didn't have before."
00:02:35.520 | And from my perspective, it's almost like financial independence is so simple that I
00:02:42.560 | often find myself wondering why is it not something everybody's doing?
00:02:46.440 | So I mean, in that sense, I'm living the same way that I've always, yeah, always probably
00:02:58.640 | pretty close description.
00:02:59.640 | I've lived this way for like almost 20 years now.
00:03:02.720 | So I mean, it's working good for me and I'm getting better and better at it.
00:03:08.560 | Basically, I mean, my original motivation was to figure out how to live with a sustainable
00:03:15.800 | footprint.
00:03:16.800 | And what I did was to essentially look at the world GDP and look at the ecological footprint
00:03:24.720 | of the world and the world population and then calculate very simply how much could
00:03:30.000 | I spend if we all had to live with the same amount, same size slice of the pie.
00:03:37.160 | And that number back then when I calculated in 2000, 2001 was about $6,000 per year.
00:03:44.280 | And so I wanted to figure out how that would be possible.
00:03:47.720 | And calculating it now, you get, I think, numbers sort of lag a little bit, but I think
00:03:53.280 | the 2019 numbers were 6,750.
00:04:00.840 | So I've stayed sort of like in the 6,000 to 7,000 range for a while, while having like
00:04:05.720 | jobs that paid more, not spectacularly much, but then I just saved that.
00:04:11.280 | And for like the first four years, I did not even really know what to do with it.
00:04:15.160 | It was just sitting in a savings account because I knew that I did not grow up in the US.
00:04:22.600 | Where I come from, this whole stock investing was thought of more as speculating back then.
00:04:29.240 | So I was just putting it in a savings account with the aim to buy a house.
00:04:33.120 | Yeah.
00:04:34.120 | So I'm kind of happy with it.
00:04:36.880 | - You're often talked about in the world of financial media for your frugality.
00:04:46.160 | Famously, many years ago, you were talked about as someone who could live on $7,000
00:04:51.880 | a year in California by some of the decisions that you made.
00:04:57.680 | But what I think a lot of people missed and didn't understand was that this came from
00:05:03.720 | a philosophical perspective that had a lot to do with sustainability and ecology.
00:05:09.880 | Your goal was not simply to spend a small amount so you could quit working.
00:05:15.800 | Your goal was to have a more modest footprint.
00:05:18.640 | Is that right?
00:05:19.640 | - Right, right.
00:05:20.640 | Yeah.
00:05:21.640 | I mean, it's a very simplistic way of seeing it just in terms of money, but that's where
00:05:29.680 | people come from, right?
00:05:32.760 | But I mean, admittedly, I grew up like your standard consumer.
00:05:37.320 | And before that, I started this when I was 24, when I was in grad school.
00:05:42.640 | So before that, I was sort of the regular consumer gadget, free techno-optimist, just
00:05:48.160 | having to have the newest stuff all the time.
00:05:51.640 | But then I had a little bit of an epiphany at that age, and then I changed track completely
00:05:57.920 | and realized I actually did not really know much about how to live well and very little.
00:06:04.160 | So like with most people, I initially started out sacrificing.
00:06:08.000 | That's sort of like the trivial, the context-free knowledge.
00:06:12.360 | You don't know anything.
00:06:13.360 | So what is the simplest thing you can do?
00:06:15.280 | You can just cut things away, right?
00:06:17.880 | And then over the past 20 years, I've learned more and more skills and learned how to combine
00:06:24.320 | them.
00:06:25.320 | So I've been able to stretch my money further and further and further.
00:06:29.680 | So I would say at this point, I mean, our lifestyle, we now live in a house in the western
00:06:35.320 | suburbs, about eight-ish miles from Chicago downtown, so just where the city ends and
00:06:41.960 | the taxation ends.
00:06:45.680 | And it's rather indistinguishable, I would say, from our neighbors.
00:06:51.400 | I mean, if you visit us, you can see there's some weird things going on.
00:06:55.520 | Like we grow lettuce indoors, or we store food, which turned out to be great for COVID.
00:07:01.920 | And we're like one of – I wouldn't say the only, but we're one of the few people who
00:07:07.000 | don't have a lawn in our backyard.
00:07:09.680 | I double-dig everything up, and now we grow vegetables.
00:07:14.320 | Last year, we had like 339 pounds.
00:07:17.840 | I weighed everything.
00:07:19.200 | I've started obsessing about this, like how well can we do this?
00:07:24.240 | I've learned woodworking.
00:07:25.240 | I've learned lots of different things.
00:07:27.320 | So when people think about 7,000, and they're spending, say, 70,000 themselves, they think,
00:07:35.120 | "Okay, he's living on a tenth of what I do, and I feel like I should have more money,
00:07:40.280 | so his life must be 10 times as miserable as mine is."
00:07:44.200 | But in reality, I spend my 7,000, and my wife spends another 7,000, so about 14,000 in total
00:07:51.080 | for two adults.
00:07:53.840 | We spend it very, very differently.
00:07:55.360 | Our budget looks completely different than sort of the mainstream consumer, or I would
00:08:00.280 | maybe even say the typical fireperson.
00:08:03.040 | - What were the influences when you were in grad school that caused you to move from your
00:08:10.120 | more consumption-oriented ways into your current philosophy?
00:08:14.680 | - Yeah, okay, that's a good question.
00:08:18.280 | So I would say, I mean, back then, it was like Web 1.0, where people did these corny
00:08:22.920 | web pages if they had something to say.
00:08:24.800 | There was no blogs, and no YouTube, no Facebook.
00:08:30.080 | Even MySpace was not a thing.
00:08:31.400 | So typically, you would come across some kind of website, and you'd read about that, and
00:08:37.720 | then you could follow it around, links to links to links.
00:08:43.960 | So I can't really point on a single thing like you can today.
00:08:46.760 | I found this blog, and this guy was cool, and I just did what he did.
00:08:50.520 | That's sort of the typical story today.
00:08:53.280 | But back then, it was more put together, a bunch of many different things.
00:08:57.920 | And I had to sort of make sense out of everything myself, because I didn't know what I didn't
00:09:04.880 | know, so to speak.
00:09:06.680 | But I think if I had to point at a progenitor site, so to speak, I would say there was a
00:09:14.400 | site called Burdened.net, I think it was.
00:09:18.080 | It was an anti-consumer site that talked a lot about the other side of our growth economy,
00:09:28.400 | as in what happens to all our junk, all the crap we buy when we're done using it, when
00:09:35.600 | it goes to the landfill, what happens, and where do our resources come from.
00:09:42.320 | So before that, I was just sort of seeing a very narrow picture of the entire cycle,
00:09:48.880 | sort of like from the supermarket to my shelves and my phone, and then to the trash can.
00:09:57.560 | That wasn't even much of a thing like Craigslist or eBay.
00:10:00.760 | So typically, if you bought something and you got tired of it, then it just got filed
00:10:03.960 | in the attic, it just sat there.
00:10:06.640 | Like dispersed entropy of our consumer goods.
00:10:11.440 | And that led me to the PGOIL community, which was a big thing at the time.
00:10:16.960 | So that's like always, I would say in general, like three different sort of pressure points
00:10:21.580 | for humanity.
00:10:22.580 | There's either population or resources, the resource depletion or the pollution side.
00:10:30.840 | So at any one point over the past, I would say, 100 years, and probably going from the
00:10:36.880 | 20s to the 21st century, it'll be one of these three things.
00:10:42.040 | So my population was essentially solved-ish in the 20th century for now.
00:10:47.840 | And energy was the thing back then.
00:10:53.000 | And the concern back then was that the world would very soon run out of oil.
00:10:59.040 | I mean, the energy consumption per capita peaked in the late 70s on a global basis.
00:11:05.920 | And I'm not sure, I don't actually think it has recovered yet.
00:11:09.160 | And of course, we know that in the US, it peaked initially in '72, which completely
00:11:14.600 | changed the geopolitical structure of how the US behaved on an international basis.
00:11:21.360 | And shale gas kind of flipped that back again for a while.
00:11:26.840 | So my initial goal, based on the footprint, was to try to figure out how to live in a
00:11:32.400 | world where resources were harder to come by, so become more self-reliant.
00:11:38.600 | So that was my original initial drive.
00:11:41.160 | And then I was in grad school at the time.
00:11:43.080 | I liked doing physics, and they paid me about, I think, somewhere between 20 and 25,000.
00:11:50.880 | I think in grad school today in physics, you earn about 30k a year.
00:11:55.960 | And since I was only spending like 6k, I could save the other, right?
00:12:01.320 | So that gave me a savings rate of around 75%.
00:12:05.760 | And so those just went in on a savings account.
00:12:07.760 | And it was only later that...
00:12:09.080 | I mean, initially, those savings were intended to purchase a house in cash, because I did
00:12:14.880 | not want to get locked into a mortgage.
00:12:17.120 | It's like a death sentence, right?
00:12:20.440 | Something like that.
00:12:21.440 | Death pledge.
00:12:22.440 | Yeah, death pledge.
00:12:25.000 | So I wanted to buy a house in cash.
00:12:27.560 | And it was only after I came to the US, but that happened very quickly, because you just
00:12:30.800 | get infused with this whole market economy thinking that, "Wow, if I invest this at 3%
00:12:36.600 | instead of 2%, then I would be pretty close to being able to make a living doing that.
00:12:44.240 | And I would not be stuck in this academic track I was on.
00:12:49.080 | And I would not have to depend on a job, for example.
00:12:53.080 | So I just wanted that freedom instead of a house.
00:12:55.480 | I mean, I sort of started moving around in the world and getting settled in a house that
00:13:01.280 | sort of faded out of my now unconventional thinking.
00:13:06.720 | I mean, ironically, we did eventually buy a house in cash.
00:13:12.400 | I'd like to ask a question about this philosophy and how you've shared it.
00:13:18.920 | I've followed your work for many years.
00:13:21.360 | You've done a little bit more media over the last few months, and I haven't followed every
00:13:25.360 | single one of those interviews.
00:13:26.980 | But I read most of your written content.
00:13:29.440 | And while I understood that you had an attraction to environmental consciousness and ecological
00:13:36.280 | sustainability, and I knew that that was a component of your thinking, that was never
00:13:41.080 | the primary thing that you led with.
00:13:44.240 | You would often lead your message with a conversation about financial freedom and the lifestyle
00:13:51.960 | of going sailing on the bay and spending time with no boss.
00:13:56.200 | And one of the things that I have observed as I watch the world, I see that so many people
00:14:00.500 | market their ideas in what I think are ineffective ways.
00:14:05.160 | And specifically, we're talking about one of those that I think is marketed ineffectively.
00:14:09.960 | Many people who are very concerned about ecological sustainability market their philosophy with
00:14:16.160 | a sense of guilt to try to cause people to feel bad about their consumption and to cause
00:14:21.260 | people to say no and deny themselves and stop being a consumer because you should feel guilty
00:14:27.760 | for your impact on the planet.
00:14:29.880 | But I've observed that you can market it with just simply frugality and personal freedom,
00:14:35.880 | and you can kind of wind up in the same place.
00:14:38.800 | If you were to go back 10 years, were you conscious of what you were doing?
00:14:42.900 | Were you intentionally trying to get people to join you with a lower consumption lifestyle
00:14:48.560 | and leading it with a positive marketing message, or did that just naturally occur?
00:14:53.360 | No, that was very sneaky and very intentional.
00:14:58.640 | So one of the things we kind of learned with the peak oil movement was that it was essentially
00:15:07.900 | preaching to the choir, very much so.
00:15:11.120 | And it was very hard to break out of this chamber of people because whenever you went
00:15:17.520 | elsewhere and said, "Okay, we have big problems here with the oil supply and that is going
00:15:22.200 | to cause some suffering, maybe loss of life, etc., etc.
00:15:26.020 | Very depressing stuff, population bottlenecks.
00:15:29.440 | Yeah, anyway.
00:15:31.920 | And almost always, I mean, when you first find something that is so life-changing, when
00:15:39.620 | you first discover that, you feel like telling other people about it, you know, like, "Oh,"
00:15:43.740 | you know, right?
00:15:45.500 | And almost inevitably and without any exception, people would always tell me, "Oh, Jacob, this
00:15:53.180 | is so depressing.
00:15:54.180 | Please, please shut up about it.
00:15:55.980 | There's nothing I can do about it anyway.
00:15:57.660 | I'm like stuck in this life, etc."
00:16:00.900 | And I'd rather not hear about it.
00:16:04.480 | You see the same thing with climate change today.
00:16:09.140 | So I figured, well, I mean, like you said, I've been living in this way that is actually
00:16:15.220 | compatible with potentially solving this problem, at least protecting myself somewhat, becoming
00:16:22.500 | somewhat self-reliant, increasing some resilience.
00:16:27.740 | But there's also this other side of it, which is I've sort of found a different way to play
00:16:32.820 | the game, which led to financial independence and not being stuck in this sort of life,
00:16:43.840 | what Thoreau called "lives of quiet desperation," or what I prefer the term "comfortable misery."
00:16:50.220 | And I'm not really happy about the way we're living, you know, but at least it's comfortable.
00:16:57.180 | It's miserable, comfortable, and safe.
00:17:00.860 | That seems to sort of be what people try to optimize for.
00:17:05.500 | And so the reach by offering, well, you can have this and you can have financial freedom.
00:17:14.780 | And more importantly, you can do something without the most typical approach in these
00:17:25.780 | communities is essentially that the solution is to build community.
00:17:30.940 | So say, okay, the climate is changing.
00:17:33.780 | There's going to be problems.
00:17:34.780 | What's the first step?
00:17:35.780 | Well, we've got to find, we're going to form a community of people who see this problem,
00:17:40.820 | and then we've got to study it as a community.
00:17:43.780 | And then once we've studied, we've got to find a community solution, and then we got
00:17:47.860 | to implement it as a community.
00:17:50.020 | So I've tried doing a little bit of that as well.
00:17:53.340 | You know, I was involved in a nonprofit for a while, almost concurrently with writing
00:17:58.940 | the ERE blog.
00:18:01.500 | That's what I did right after I quit physics.
00:18:04.780 | But the problem is always, I mean, at the community level, you can sit and talk and
00:18:10.900 | agree on stuff, but it's hard to do the leadership required to get everybody to pull in the same
00:18:20.220 | direction.
00:18:21.980 | Especially when people as individuals, you know, we essentially as consumers, we've been
00:18:25.820 | divided and conquered.
00:18:28.100 | So that we can't really do anything because, well, we had to go to work every day, right?
00:18:34.580 | And we had to pay our mortgage, we had to pay our bills and so on.
00:18:38.540 | And so with the financial independence thing, you can try to do sort of attack the problem
00:18:44.940 | at an individual level and say, okay, we can't, communities are really difficult, but at least
00:18:50.380 | you can do this.
00:18:51.380 | If you do this and you get all these other benefits, and then some people are of course
00:18:55.180 | going to say, well, I don't believe in reality.
00:18:58.460 | I think technology can solve all our problems.
00:19:03.100 | And instead of me being frustrated by that, I could say, well, that's great as long as
00:19:07.580 | you're spending a little less, you know, that's helping the problem.
00:19:11.180 | There's no longer hurting the problem.
00:19:13.060 | And it's kind of the same thing when people ask me, what do you think about the fire movement
00:19:17.300 | these days?
00:19:18.300 | And I'm like, well, practically nobody is spending 7,000.
00:19:21.220 | Isn't that like bad or something?
00:19:23.340 | Well, I mean, if you can take people who otherwise would have spent 100,000 and get them to spend
00:19:29.820 | 70,000, right?
00:19:31.860 | That's, you know, for each one of those being sort of converted or changing their lifestyle
00:19:39.660 | is worth like five of my kind, right?
00:19:44.740 | So in that sense, I think that has been way more effective than the approach where you
00:19:53.300 | go after essentially attacking the problem directly.
00:19:58.260 | - So when you look at the fire movement and you consider, I guess, as one of the more
00:20:08.100 | well-known inspirations in the space, when you look at the fire movement, I hear that
00:20:15.300 | you're satisfied that at least we're moving in the right direction in terms of your personal
00:20:20.460 | goal of getting people to consume at a more reasonable level and that we're doing it with
00:20:25.140 | a more easily marketable message, helping people to live a better lifestyle, focus on
00:20:32.100 | financial freedom, and then having the environmental benefits as in some ways an unintended side
00:20:37.360 | effect for many people.
00:20:40.220 | What are your thoughts though in terms of what you see to the extent that you watch
00:20:43.500 | the fire movement at all?
00:20:44.740 | Do you feel like things have been changed?
00:20:47.700 | Are you happy with the direction?
00:20:49.820 | What are your thoughts?
00:20:50.820 | - Yeah, so I mean, first of all, of course, the fire movement is huge now.
00:20:57.980 | So it's much bigger than the three or four people that we were like in the 2010.
00:21:03.480 | So if I make blanket statements about it, I'm probably going to piss people off, at
00:21:08.260 | least some of them, right?
00:21:09.800 | But I think there are two perspectives on it.
00:21:13.180 | So the first thing is that the space has sort of filled out.
00:21:19.220 | Back then, it was quite easy to dismiss me as being this crazy guy who lived in an RV
00:21:25.460 | at the time.
00:21:26.900 | You're familiar with the Wheaton EcoScale, right?
00:21:32.020 | - Yes, Paul Wheaton.
00:21:33.660 | Paul Wheaton says that...
00:21:34.660 | Go ahead, you can explain it.
00:21:37.660 | - Yeah, so he made the Wheaton EcoScale to describe the problem with doing outreach or
00:21:44.700 | explaining complex things within permaculture.
00:21:47.620 | And I found that the same problem actually exists with the ERE philosophy, because it's
00:21:56.660 | substantially more complex than just earn more than you spend and put everything in
00:22:03.900 | an index fund, which is kind of what the intro fire movement has sort of settled on.
00:22:12.140 | So these days, I would say the ERE or the fire Wheaton scale has filled out.
00:22:19.300 | So it's a lot easier to find someone who's inspiring to you, someone who's not too extreme.
00:22:25.180 | And once you've sort of learned things at a given level, you can move on to the next
00:22:29.380 | level and find a new teacher to inspire you.
00:22:31.660 | And you can almost always find another one who knows just a little bit more and when
00:22:36.780 | you're ready to move to the next step.
00:22:39.340 | And that did not exist in the beginning.
00:22:44.140 | Even 10 years ago, people didn't really know where to put this kind of movement, what it
00:22:48.500 | was.
00:22:49.500 | At least like promoters of senior living lifestyles.
00:22:53.100 | There was this huge discussion about what retirement actually was.
00:22:57.220 | I mean, you're probably part of the early stuff.
00:23:02.300 | It was immensely frustrating because of course, retirement does not mean the same to someone
00:23:07.220 | who does it at age 35, as opposed to someone who retires at age 75.
00:23:13.700 | I'd say sort of like on the flip side of that, of having it having grown much bigger, is
00:23:23.700 | that to a large degree, the sort of like the public appearance of the fire movement has
00:23:29.580 | changed.
00:23:30.580 | I mean, we started out as a bunch of nerds who wanted to solve the problems of the world.
00:23:36.140 | And now it's sort of been taking over by entrepreneurial business oriented types who are seeking to
00:23:42.660 | sell seminars and camps and travels and consulting services and what have you.
00:23:53.380 | And fire has, I mean, the media narrative now for fire, which I think might be somewhat
00:23:57.700 | justified is that it's mainly a bunch of software engineers with six figure incomes who, you
00:24:02.820 | know, pat each other on the back for being frugal when they spend like 10% less than
00:24:08.020 | their co-workers.
00:24:09.020 | Right.
00:24:10.660 | And I think there's some truth to that.
00:24:12.700 | And I think the problem with that is that the original intention is somewhat gone.
00:24:21.900 | That people who are not into the fire movement, who have not familiarized with sort of like
00:24:27.300 | that it is a very diverse set of people get the impression, well, that's just a bunch
00:24:33.720 | of rich people who want to be millionaires.
00:24:38.460 | That's the impression I'm getting.
00:24:39.820 | And that could be completely wrong because I'm not really such a big, big part of sort
00:24:45.060 | of like the active fire movement.
00:24:46.900 | I don't know if that's correct.
00:24:50.260 | So that's what I mean.
00:24:52.580 | Right.
00:24:53.740 | So I'd like to pivot a little bit here because I wanted to get a little bit of your backstory
00:24:58.740 | and kind of update it.
00:25:01.540 | But one observation or one area where I'd really like to explore with you is specifically
00:25:08.060 | some of the technical details.
00:25:10.240 | When you stopped writing for early retirement extreme, you went into the investment world
00:25:15.180 | and you spent several years working as a professional quant.
00:25:19.500 | And so I think you've often had a deeper level of analysis from the perspective of investing
00:25:26.620 | and personal financial management than many people who haven't had that kind of experience.
00:25:34.340 | Do you look at, given your background, thinking about big systemic risks, do you think that
00:25:44.300 | the way that financial independence is talked about with many people, things like the 4%
00:25:49.660 | rule, using index funds, etc., do you think that these are safe ways to pursue financial
00:25:55.340 | freedom for most people?
00:25:56.860 | Well, I mean, not that nothing is safe, right?
00:26:03.380 | I think maybe that's the problem, that there's not really this realization that people are
00:26:07.380 | actually dealing with financial markets and not a savings account.
00:26:13.500 | I think from that perspective, it's important to understand that the financial markets are
00:26:19.020 | a complex adaptive system.
00:26:21.900 | So it's not an engineering problem as much as it's a socioeconomic or social problem
00:26:28.060 | or philosophical problem.
00:26:30.100 | So by a complex adaptive system, I mean that complex usually implies many components that
00:26:36.580 | are connected in different ways that are not immediately obvious.
00:26:44.600 | We have many different kinds of products and many different kinds of agents like private
00:26:49.100 | investors, institutions, entire governments, and they do not necessarily have the same
00:26:54.700 | goals.
00:26:55.700 | They have different interests.
00:26:57.020 | And not all of these interests are necessary that the market should go up.
00:27:00.380 | I mean, if you're like a big bank, you might not care much that the market goes up because
00:27:04.500 | you're making your money doing transactions.
00:27:09.500 | And adaptive means that people are mainly looking out for their own interests and not
00:27:14.980 | so much the market as itself.
00:27:17.060 | So the financial markets adapt to the environment as it changes and it adapts to itself.
00:27:25.980 | And I think the problem is when you get down to the sort of like the more simplistic level,
00:27:33.460 | like what's currently popular sort of in the, I would say, what's a good term for this?
00:27:39.340 | Retail analysis is probably a bad term.
00:27:43.340 | Typical fire movement planning is that people like to use statistics to try to sort of get
00:27:49.700 | a grip on what this complex adaptive system is doing so it's easier to think about it.
00:27:56.860 | And that's where you get things like the 4% rule.
00:28:01.460 | And the problem with that are things like, well, you take the average of all returns
00:28:05.900 | and you get something like 10% per year, right?
00:28:09.620 | Because that's what the market has returned historically for most of the 20th century.
00:28:14.900 | And then you can do something like sequence of returns, or you can do the sequence of
00:28:18.380 | returns randomly and you can say, okay, the minimum withdrawal rate is 4%.
00:28:23.380 | And the problem there is I think at least that's my impression of seeing people talk
00:28:27.900 | about the 4% rule as they treat it very much like a permanent savings account or like an
00:28:33.460 | annuity.
00:28:34.460 | Well, all you have to do is you throw everything in stocks and then you like wave your hands
00:28:39.660 | a bit and you say 4% rule in the long run.
00:28:44.660 | And that means you can take out 4% constantly just because historically the proof essentially
00:28:55.060 | is in the 20th century.
00:28:56.380 | But I mean, the 20th century, speaking a little bit more as a sort of like an operator, as
00:29:02.340 | a professional would have a different view of how this works.
00:29:07.500 | Especially as a quant, you're very concerned about what your sample data is and what the
00:29:14.620 | population data is and whether those two are the same thing.
00:29:20.620 | So one of the problems, like in the 90s, there were people doing a lot of day trading.
00:29:32.860 | They almost stopped working, took out credit card debt, and then they started day trading
00:29:37.900 | dot com stocks.
00:29:39.660 | You see a little bit, I mean, we tried to have like a little bit of like a resurgence
00:29:43.060 | of that with games, game stonks, meme stonks and all that.
00:29:48.020 | And everybody, as long as the main market goes trends upwards, right, then you can sit
00:29:54.620 | and day trade along that major trend and think you're a genius.
00:29:58.240 | You can even do pretty bad because you have this kind of rising tide underneath you that
00:30:03.540 | pushes everybody up.
00:30:04.900 | So that overall, you'll have more successes and you will have failures.
00:30:09.360 | So you'll have a positive return rate, even though you might be adding negative alpha
00:30:14.080 | to that trend.
00:30:15.800 | So the 20th century had a lot of trends that often go ignored.
00:30:21.180 | The 20th century in the US, particularly where the 4% rule comes from, has some trends that
00:30:27.460 | might not be sustainable in the 21st century.
00:30:32.660 | I mean, you had, especially if you do more recent data sets, like from the 80s, you have
00:30:37.700 | had interest rates that have just gone from like 20% down to zero.
00:30:42.920 | So if your investment history or autobiography is from that period, you have, through your
00:30:49.820 | entire investment career, been operating in a world where interest rates have been declining,
00:30:56.060 | which all things being equal pushes stocks upwards just because of that.
00:31:02.060 | Not from any inherent sort of investment strategy in stocks, but just because interest rates
00:31:06.180 | are declining.
00:31:07.180 | The 20th century also has had the US rising to become a dominant economy in the world,
00:31:12.940 | essentially a global empire, if you will, winning the Cold War, sort of underline that.
00:31:20.860 | That cannot be repeated.
00:31:21.940 | It's already the world empire, right?
00:31:24.220 | So we cannot do that again.
00:31:25.500 | So you do not get that boost again.
00:31:28.500 | The thing I mentioned earlier about energy use per capita increased until it peaked in
00:31:34.300 | the late 70s.
00:31:36.340 | So that is also on the decline.
00:31:37.340 | So now we're looking more at growth in efficiency of energy use, like the carbon efficiency.
00:31:45.160 | So how much GDP do we get for each barrel of oil, instead of looking at how many barrels
00:31:51.580 | of oil can we drag out of the ground?
00:31:54.700 | So that's a different kind of economy again.
00:31:56.900 | So that's changing as well.
00:31:58.660 | And so if you're working in the quant world, trying to analyze these stuff, list off mathematically
00:32:05.220 | to find some kind of trading strategy, you want to detrend these things.
00:32:09.100 | So you can see if you are actually adding some like intelligent strategy to this, or
00:32:14.660 | you're just riding a high tide.
00:32:17.500 | So the trends for declining productivity growth, because we essentially have the best economy
00:32:25.180 | on the planet, right?
00:32:26.540 | So it's hard to improve it.
00:32:28.260 | We have picked the low hanging fruit on all the branches, and there's less food further
00:32:34.540 | up.
00:32:35.780 | So we have a lot of infrastructure debt that we need to pay to.
00:32:40.180 | So in that sense, and you can see that if you take the 4% rule and try it in other countries,
00:32:45.460 | you don't get 4%, right?
00:32:47.940 | If you go to countries that lost World War II, it's more like a 1% rule or a half percent
00:32:52.580 | rule.
00:32:54.020 | Because if you lose a World War, that's pretty bad.
00:32:57.580 | So that was a long answer.
00:33:00.300 | It's pretty damaging to lose a World War.
00:33:02.420 | So this is trying to think of what order to approach this in, because the things that
00:33:10.460 | you're talking about are things that are important to me.
00:33:14.660 | And I'm not waving my hands and attacking something like the 4% rule with passive index