Month: July 2025

This is a fairly old book. It was written by Yale economics professor Irving Fisher in 1930. It is pretty astounding that much of what is contained in it is still relevant today. It was written well before the invention of the credit card and when auto financing was a relatively new thing. This book answers a question that is quite simple to pose, but rather difficult to answer concisely. It is this – How are interest rates determined? Currently, in this country, the Federal Reserve explicitly states the interest rate at which it will lend money to banks. From this many other interest rates are calculated. These include mortgage rates, car loans, and business loans, but what makes a person comfortable lending or borrowing at a particular rate? The answer can be simply stated – it is the level of impatience. Impatience is typically motivated by enjoyment. A young, single man who just landed his first job out of college may take out large loan on very nice car. This will give him the immediate enjoyment of driving a comfortable, flashy and stylish vehicle. He is trading some of his future income (he’ll be making payments for a while) for the immediate satisfaction of a flashy new car. The lender is happy to get a stream of revenue for the next five, six, or even seven years. The young graduate is exchanging some of his future interest for immediate enjoyment. If the new graduate had also recently become a father, he would probably be less willing to make this exchange at as high an interest rate as single graduate, if at all. The father, in this example, has less impatience than the single graduate. Impatience will drive someone to sacrifice future interest for immediate enjoyment. This will factor heavily into the interest rate this person is willing to pay for a loan.

The interest rate where the supply of those willing to borrow at that rate, matches that of those willing to lend at that rate, with risk factored in, will be the interest rate. It does make one question how something like this can accurately be computed and then dictated by the Federal Reserve. As with anything related to economics, at least in my understanding, is that anything artificially induced will eventually be corrected. This is, in part, one reason why communism failed in the former Soviet Union. Supply and demand is a naturally occurring phenomenon. Artificially dictating it with someone like a Czar that predetermines that we need to build x number of automobiles and x number of washing machines proved to create excesses of some things and shortages of others. It created waiting lists for cars and warehouses of rotting, unused washing machines. So how does the Fed get the Federal Reserve lending rate right? I am guessing it often does not.

Later chapters in the book derive equations for market rates and rates of impatience with fixed assumptions. Sort of like equations for the movement of a projectile in a vacuum or movement of a projectile with no wind. These formulae go deep into the weeds applying Calculus to account for changes in parameters over time. In the end, however, the author acknowledges that they discount some consumer psychology, risk, and other factors and that theory and practice can be miles apart. If you have any interest in reading this book – who doesn’t want to read a 500+ page economics book? –  you can probably skip these chapters (11-13). It is a very dry read through these chapters and you probably aren’t going to come out with much you can apply from them unless you are, or will be a graduate-level economics student. Ultimately, the interest rate will approach a point where the incomes, supply, demand, impatience,  and risk of all involved near an equilibrium point, but never really settles as all the multitude of variables involved continuously change.

Towards the end of the book the author makes the assertion that interest rates and prices are positively correlated, but that interest often lags price changes. It says that interest follows prices, but that the opposite is not necessarily true. I guess the Federal Reserve (The Fed) thinks differently? The  Fed typically alters lending rates to banks to control inflation. Inflation is another way of saying pricing. Inflation is an increase in pricing. In manipulating rates, The Fed does what this author would likely disagree with, which is manipulate interest rates to control pricing (inflation). I guess this view of economics has changed since this book was written? Let’s hope so, or The Fed is just manipulating the economy without hope of predictable results. Anyway, the insight into predicting different levels of impatience in people still holds true and is good at predicting human behavior with regard to lending, borrowing, and spending behavior. This was an interesting book, but I think I need some fiction to wash it down. I am going to deviate from the economics/investing books for a little while.

The fifth and final book in The Hitchhiker’s Guide to the Galaxy trilogy.  This book had been sitting on my shelf for nearly a year. Despite having read the first four books in the series, I was somewhat hesitant to read this one. It was the last in the series written by Douglas Adams. There is one more (And Another Thing…) written by someone else, but with approval from Adams’ estate. The reviews of Mostly Harmless  painted it as a bleak story. I did not really find that to be the case. Much of the humor in Adams’ writing comes from the misfortune of the characters Arthur Dent and Marvin the robot. Marvin does not make it to this book, having met a merciful end in So Long and Thanks For all the Fish, but Arthur is with us until the end of this one. His misfortune is almost always of the harmless variety – he gets horribly embarrassed in public or is left alone in his bath robe on a planet of Neanderthals for a significant period of time. In this book he finds out he has a daughter. And it turns out, a very disgruntled one. But nothing I would characterize as bleak. It has Elvis performing with the house band in a bar on some distant planet. That can’t be characterized as bleak!

The same reviews I read that said all the characters get together at the end also appear to be incorrect. We do have Ford Prefect, Arthur Dent, and Trillian reunited on some dimensional abstraction of earth, but  the multi-headed Zaphod Beeblebrox is noticeably absent from the book, despite being mentioned several times. Adams is a great writer, the imagery he evokes, the dialogue he presents, and the absurdist humor he presents is unequaled in science fiction. It is so unfortunate that the man spent so little time with us, he passed away at just 49 years old, but his stories will likely outlive us all.

 

This book is mentioned in a book I previously read, The Bogleheads’ Guide to Retirement Planning. It gives much of the same advice on investing, but in a little more detail. It recommends buying the market, just as the Bogleheads’ book, but it also delves into the psychology, history, and business of investing. Combined with theory, psychology, history, and the business of investing make up the four pillars.

I already mentioned what the majority of the theory entails – buy the market. Use index funds and own some of everything, domestic stock, international stock, bonds (mostly short term), and REITs. The reason is that nobody has reliably beaten the market for any substantial period of time. Large investment companies have far more resources and insight than you do, and they often cannot do it. What chance do you have picking individual stocks? I do have a little disagreement on this. I work in pharmaceutical and technical industries and have a computer engineering degree. If I recognize a company or idea that shows great promise during the course of working with these companies, I will deviate from this core strategy somewhat and buy these companies in addition to buying the market. I will likely stop doing this as I get nearer retirement because it does entail a little more risk. A little more risk in this case often means a little more reward. I will not however, buy based on internet or media advice. This is likely tainted and biased or simply a case of a monkey throwing darts at a stock page.

There is also some industry that is always “hot”. Right now it is Quantum computing and AI. Companies such as Palantir (PLTR), Nvidia (NVDA), ARM (ARM), and Quantum Computing (QUBT) have done quite well recently. This is where the pillar of history comes into play. This book describes investment events going back to the 1600’s. In 1683 William Phips had investors set up a company to find sunken treasure in the Bahamas. It proved widely successful, with hundreds of tons of silver recovered. This lead to companies trying similar excursions with “new technology” to assist in finding even greater amounts of treasure. Untold fortunes were dumped into these ventures with no return. Later, in the 1800’s, English railroads were proving to be quite profitable investments. So much money was poured into this that rail lines were being built that made no sense. They were building lines that basically went from nowhere to nowhere with no hope of ever recouping investment costs. Later it was the dot-com bubble that popped in 2000. Regardless of the technology and its recent history, there is plenty of evidence that investors tend to over-invest in the newest technology. The most interesting thing I learned from investing history is that it is more often than not, the user of the new technology that benefits most from it, not the creator. Rail lines helped manufacturers that used the rail companies to move their goods more than it benefited rail companies in the long run. Personal computers helped businesses that used them generate more profit than those who manufactured them. Apple and IBM nearly teetered on bankruptcy for periods of time while businesses using the technology they helped promote prospered as the computer industry overloaded with competition. With any new technology, there is going to be an inevitable, initial influx of funds with a public eager to make a quick profit. Be familiar with similar events in the past and don’t get too caught up in the emotional wave that new technology often brings.

Psychology is a pillar most do not think about when discussing investing. This is a big mistake. After reading Basic Economics, by Thomas Sowell, it became apparent to me that economics is largely just a study and application of the effects of human behavior on matters of finance. If everyone thinks the economy is great, it probably will be. The market acts in this manner. It can be wildly emotional and unpredictable. It is important to create a plan and stick to it. If you invest for long enough, you will almost certainly encounter a time when your portfolio loses 20%. This can be very disheartening and cause many investors to bail out, deviate from their plan,  and accept losses rather than incur more. If you have a good plan in place, this is when you sell your more profitable assets to buy those currently at a discount. Psychologically this is tough, but to follow a plan and keep a portfolio in balance (ratio of stocks to bonds), it is necessary.

Finally, like the Bogleheads’ book, this book does not look on financial advisors favorably. Here is a quote from the back cover, “The stockbroker services his clients in the same way that Bonnie and Clyde serviced banks.” Like the Bogleheads’ book it points out that success and failure, long term, in investing, can be the difference of a few percentage points. If you are paying an advisor 1% and he is buying funds that have high fees, you are starting out in the hole. I have had money money in a managed account. I saw exactly what they do with it. It is exactly what is outlined in this book. Having Vanguard or Fidelity manage your money will likely work out for you if you do not have the stomach for investing for yourself, but it will likely cost you a couple of percentage points. Compounding over many years, this will likely amount to a great deal of money. This book is well worth reading so you can handle your own investing, or at least identify what proper investing should look like.