07 Oct 2021 But Does It Work?

On Monday night I turned the TV on, headed to ESPN2, and saw Jon Gruden looking the perfect picture of confusion as he was informed that the start of a football game in a brand new, $5 billion, domed stadium would need to be delayed, due to lightening in the Los Angeles area.

Earlier Monday I had read a fascinating piece about how the Mafia in New York is going through the growing pains of modernity, including a hilarious story of one Columbo associate sending threatening texts (“Hey this is the 2nd text, there isnt going to be a 3rd“) to a union boss, thereby providing fairly clear-cut evidence against himself in his own extortion trial. Here’s the typical tongue-in-cheek Matt Levine on that situation:

First of all you have created excellent evidence for prosecutors at your extortion trial, but also, is this threat effective? If you show up at a guy’s office with a baseball bat and say “this is your second warning, there won’t be a third,” you get your point across. The baseball bat suffices to explain what will happen instead of a third warning. “If you don’t give us the money I will stop texting you” is just strictly not a threat at all — who doesn’t want you to stop texting? — and you’re not there with a baseball bat to make the implicit threat clear. I guess that’s the defense at trial. “No, that text wasn’t a threat, that was just an opt-out message, what I meant by that was ‘Please give us our money, or text STOP to opt out of these texts.'” 

I share both of these stories because they seem to me to be great examples of form vs. function, and the importance in function-heavy applications of asking a simple question: Does it work?

Quite possibly I am a broken record on this, but let me state clearly again that I believe money on its own has no meaning (despite our society’s best efforts to make it the ultimate meaning…). It’s a tool, and a tool has no meaning on its own, because it needs a human to imbue it with such. And in the form vs. function question, a tool is the opposite of, say, Beethoven’s 9th symphony, a piece of art whose beautiful form is its function. A tool’s function, by contrast, is its form. 

And if money is a tool, something where function is of the essence, here are a few money-related areas where I think it’s especially important to ask the question: Does it work?

Your budget. Maybe a better term for this is “spending awareness.” Whatever you call it, there are all sorts of ways to be aware of where your money comes from and goes each month. Some people keep receipts—physically or electronically—and track things manually in a spreadsheet. Some people take some time each month to look at their credit card and bank statements and simply try to notice trends and spot opportunities to allocate their resources more effectively. And some people use software like You Need A Budget to combine both of those approaches. At the end of the day, which tactic you use doesn’t matter so much. What matters is, Does it work? Do you use it regularly, and does it enable you to know where your money is going and make course corrections when necessary?

Your insurance. The concept of insurance is one of the coolest things to come from the evolution of finance over the last few thousand years or so. At its best, it is an extremely useful tool—for individuals and societies—for sharing risks in appropriate and cost-effective ways. The problem is that insurance is mostly a simple, functional tool, one that is based on actuarial tables and statistics. And actuarial tables and statistics don’t need to earn a paycheck. Which means that some people who sell insurance are incentivized to sell products which over time steadily deviate away from the functionality you need, and toward an over-complicated form which leads to higher sales commissions for them. You almost never need policies that do lots of things with mediocrity; you generally just need policies that do one or two things extremely well.

Your portfolio. There is a widespread desire for investment portfolios to be aesthetically pleasing. To include darling stocks, to use various quantitative factors that have been squeezed into a “proprietary model,” to buy any IPO one can get one’s hands on, to purchase private placements without any experience because it’s flattering to be considered an “accredited investor.” And so on and so forth. Sometimes the desire to have an aesthetically pleasing portfolio shows up in the romantic notion that one can price current information into one’s portfolio better than the market has already done, which leads to the well-documented “behavior gap.” I can’t be clear enough: Your portfolio is not a piece of art; if you’re hanging it up on your wall you should be embarrassed. It doesn’t matter what it looks like, it just needs to work. And it so happens that in the world of investing, the portfolio tools that work the best for the most people over the longest period of time are not the most aesthetically pleasing. They are simply the cheapest, most tax sensitive, and most stick-with-able.

Not everything in your life needs to be optimized for function. Tools need to be useful, but not all things are tools, and most importantly people aren’t tools, despite our bad habit of using that language sometimes. “Does it work?” probably shouldn’t be the primary question you ask about the wallpaper in your house, or your record collection, or the sports you watch, or the places you travel, or the way you do your hair. 

But you better believe if you aren’t asking that question of your money, the chances are pretty high the answer—if you did bother asking—would be “no.” If we can help you ask the question and get more “yes” answers to it, please let us know.