Don't be your worst enemy. A self-inflicted wound is so sad. Unlike financial blindspots, where you can plead ignorance for your actions, a self-inflicted wound is a willful and always a harmful action that puts you in a worse off situation than before.
As the markets tumble, it's worth highlighting some self-inflicted wounds that could have prevented this fall. We'll also learn about other common self-inflicted wounds that may derail one's journey to financial independence.
Remember, the easiest way to never saying, “if I knew then what I know now,” is to simply listen to people who've been there before.
Examples Of Self-Inflicted Wounds
* Jerome Powell, telegraphing more rate hikes in 2019.
Despite the S&P 500 already correcting 12%+ from its highs in 2018 given all the data pointing to a slowdown, Jerome decided to raise rates again on Dec 19, 2018, and telegraph another two rate hikes in 2019. Although the market was expecting the Dec 19 rate hike, it had lowered its expectations for any further rate hikes in 2019 to less than 25%. As a result, broader markets went from +1.5% to down ~2% that day, further deepening the sell-off.
Jerome could have taken a wait and see approach to help restore some investor confidence by pausing in December or providing more dovish language for 2019. Alas, he decided to keep stubbornly moving forward in spite the carnage and the expected carnage. Due to pride and a $100M+ net worth, he feared being viewed as a puppet to Trump.
Now, JP will be viewed as one of the most reviled men in the world as millions of investors suffer financial loss. He has hurt his reputation, his family's reputation, and lost friends in the remaining years of his life. Do you really think his rich friends at the country club are going to give him the time of day next time he pops in for an Arnold Palmer? Of course not.
If the downturn worsens, corporations will be forced to stop hiring and start firing. It's one thing to lose money in your investment portfolios. It's another thing to lose money and also lose your job. The livelihoods of millions of people are at stake from Jerome's refusal to simply take a pause and see what the next quarter's economic data reveals.
It doesn't matter whether you think what JP did was right or wrong. The end result was a collapse in the financial markets in the ensuing days. If you had any stocks, you lost big.
* Bad politics.
We know that most politicians on both sides are egomaniacs who are primarily focused on obtaining and maintaining power for themselves. There are countless examples of political corruption that occur every year in every country at the expense of the people they are supposed to represent. It is truly fascinating how millions of people continue to get duped by such people.
The CEO of FedEx, which reported disappointing results and slashed 2019 earnings and revenue guidance summed bad politics up perfectly,
“This is very, very important, and I’ll just conclude by saying most of the issues that we’re dealing with today are induced by bad political choices, I mean, making a bad decision about a new tax, creating a tremendously difficult situation with Brexit, the immigration crisis in Germany, the mercantilism and state-owned enterprise initiatives in China, the tariffs that the United States put in unilaterally. So you just go down the list, and they’re all things that have created macroeconomic slowdowns.”
Due to the fight over funding a border wall, the US government is now in its longest shutdown ever in 2019. The cost of the shutdown will likely run over $10 billion and hurt consumer and investor confidence. After a difficult 2018 in the stock market, we're setting ourselves up for more self-inflicted disappointment.
How about Ted Cruz going to Cancun while Texas froze in February. Amazing!
* Not properly managing your burn.
Although the startup failure rate is high, due to inexperience and irrational confidence in their product and market opportunity, a large reason for their failures is the inability to properly manage their monthly burn (expenses).
For example, during a podcast interview, the founder of a food delivery startup called Bento admitted he did not realize he spent $70,000 more than expected (30% – 40% more) one month. As a business owner, I find that very hard to imagine.
Running a new business is extremely difficult, no doubt. I salute all those who've had the guts to try. It's imperative that all startups and all businesses frankly, focus more on profitability, and less on growth at any price as the economy slows.
Related: Career Advice For Those Joining Startups: Sleep With One Eye Open
* Giving up on the cusp of success.
I cannot believe how many people give up before the going gets good. I'm referring to the constant job hopping after just one or two years because things aren't just perfect. I'm talking about quitting the side hustle after 10 months because it's not generating enough money for your liking. The longer you last, the more lucky breaks you will have!
There is no closer correlation between effort and reward than in the blogging world. This correlation is one of the main reasons why blogging is one of today's best businesses. One of the main reasons why people hate their jobs is because they feel that no matter how hard they try, they'll never get ahead. With blogging, the more you write, the greater your traffic.
No matter how much revenue I generated for my previous firm, it was never enough because I had to subsidize money-losing businesses. I understood the importance of being a team player, but after 13 years, I figured I should strike it out on my own instead of staying and complaining.
Despite having such a tight correlation in the blogging world, so many people quit before a year is up. But it takes 6 – 24 months to be found by the community and by search engines. Once you get through that initial cavern of silence, things start getting better and better due to increased organic traffic and a growing audience.
It's like not spending a small fortune to watch a movie at the theatre when it first comes out. Once you patiently get through the initial hype, you'll have a new movie to watch on DVD or streaming practically every week at a low fixed cost.
Why give up when you can keep on going? The secret to success is putting in 10+ years of unwavering commitment. Can you imagine giving up in year nine? Now that would be a huge self-inflicted wound.
* Quitting instead of getting laid off.
A baby panda dies in the forest every time someone quits his or her job. I have seen countless examples of people who have quit their jobs only to sorely regret their decision because their colleagues who didn't quit got laid off with a nice severance package months or sometimes days later.
Even worse than quitting your job without a severance is quitting your job without a severance, plus having little money and nothing else lined up. The master severance negotiator is able to successfully negotiate a severance, take time off, and have a new job ready to go before his or her severance runs out.
In a downturn, the ability to find another job at a salary you want will become more difficult. Therefore, it is imperative that you leave with as long a financial runway as possible.
* Thinking you just can't lose.
Whenever you think you just can't lose is usually the time when you lose the most. My personal example is buying a Lake Tahoe vacation property in 2007 the year after earning the most I had ever made in my life. I was second-year VP and felt like the sky was the limit for my career. Of course, the financial crisis happened and I ended up losing 100% of my 20% downpayment and then some because the condo declined in value by over 40%.
Ever since that fateful misstep, I've had to do a lot of self-reflection before taking more risk outside my normal parameters. I suggest you give yourself a gut check as well whenever you are feeling extremely swell.
Investing too much in the stock market before the 2008-2009 collapse was a huge self-inflicted wound.
* Harassing someone in the workplace.
If you are discovered harassing someone in the workplace or worse, especially if you are more powerful, your reputation will be destroyed in a nanosecond. It doesn't matter how much good you provided to the world over the decades, you will be tarnished for life.
There is no coming back for men like Charlie Rose, Matt Lauer, and Les Moonves. There is definitely no coming back for guys like Harvey Weinstein and Bill Cosby. I am sure they would donate all their fame and fortune to get back their reputations.
Even more devastating than their lost reputations is the dishonor their actions inflicted upon their respective families. These men could have had illustrious carers and be forever remember for good. What a self-inflicted wound to harass others.
* Social media time sinkhole.
Think twice, speak once. But for some reason, folks over social media continue to speak twice and not think at all! Spewing incredible nonsense on social media has a great way of coming back to haunt you. We are living in a hypersensitive world. There's no upside in offending anyone anymore. Even comedians, whose goal is to find humor in the offensive, are getting thrashed.
Keep your time spent on social media to a minimum. Besides, Facebook is reading and sending all your private messages to other companies in order to sell you more ads anyway. So why bother?
* Being an insufferable a-hole.
Sooner or later, all of us will need a helping hand. But if you've treated people poorly in the past or have always decided to take, take, take before ever giving, nobody will come to your rescue.
Adopt the good habit of giving as much as possible without any expectations. Treat your staff as well as you would treat your most prized customer. Fight to pay for the bill. Do your best to let go of any jealousy or hate you have for someone else. It'll only end up eating you up inside.
People will never forget your act of kindness and will go out of their way to return the favor one day. I thought this was a perfect video to sum up the importance of being kind. People just want to help other people they like. A self-inflicted wound is being a terrible person.
Don't Be Your Worst Enemy
On your road to financial freedom, you want to try and minimize your self-inflicted wounds by thinking logically. Consistently try to hit singles and the occasional double, instead of always trying to go for the home run. If you want to go for a home run, do so with 10% or less of your investable net worth.
I've seen too many people make a small fortune and lose it all because they didn't manage their risk parameters properly. Be wiser by making sure your asset allocation fits your risk profile.
The self-inflicted wound I'm trying to deal with at present is working too much and stressing about how to manage FS and my investments when I would be happier taking it easy and spending more quality time with my family.
If only the good times could go on forever. Alas, tougher times are ahead.
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Get your finances right the first time with the help of technology. A self-inflicted wound is waking up 30 years later and wondering where all your money went because you weren't on the ball!
Featured image is by http://www.pejac.es/seppuku/.
Sam,
I hardly think a correction-level sell-off in the stock markets, after an almost 10yr bull run off the March 2009 lows, is reason to think the Fed should not have raised rates. Current economic indicators are still very strong, and the Fed sees both the data we see as it’s released to the public, as well as data it has early access to, pre-release by 2-3 days, prior to rendering a rate decision. Fed says it continues to remain data-dependent, and we are months away from seeing to what extent the Fed’s past rate rise decision are impact the economy.
I agree with Sam about Jerome Powell. He could have said ‘we will wait and see’ how the economy performs before making a definite ‘2 rate hike’ statement. He could have said, ‘possibly zero to 2 rate hikes’. But no, Powell had to say – we will have 2 rate hikes. It sounded like it was set in stone. Powell also said the Quantitative tightening will be on auto-pilot. That really spooked everyone. Powell is not listening to the market. The market is forward looking and the market is factoring in the effects of the trade war and 25% tariffs, and higher interest rates in 2019, which will cause a slow down. Powell shrugged it off when he was asked about the market. He just said ‘which market, there are many markets, knowing fully well that the media was asking about the stock market.’
If you look at Stan Drukemiller’s videos on YouTube, he was arguing for rate hikes several years ago. He was thinking there was too much borrowing and too much Federal spending, and there are some hidden zombies in the mix that will emerge when rates go up and the economy gets worse. He wanted to sneak in rate hikes in the past so that rates would eventually get to 3%.
His latest video, https://youtu.be/HFAzZttioEk, is kind of interesting. “We have had eight years of free money” and need to let the current bubble deflate slowly. Sounds like he wants the Fed to pause for a while.
That’s not a self-inflicted wound, that’s my bitcoin wallet! (badum-tss)
Fed rates are normalizing after 8 years of ZIRP.
All this pain has been spring-loaded since 2003. Not complicated.
Not speaking to anyone in particular, but the general mob that sees Jerome Powell as anything other than Batman. Sorry it hurts, rub some dirt on it. And feel free to give back all that Real Estate Equity that has been gained at 2% interest rates, and U.S. stock increases double/triple to S&P500 2,500, and use it to pay back all the foreclosed property that wound up in jingle-mail.
Jerome Powell isn’t alone in his decisions – the board largely supported an increase, with only two of the members wanting it to be unchanged.
Thanks Sam for sharing a most touching video. It helps keep things in perspective and reminds us that the best and most important things in life are free and cannot be bought with money.
Everything seems a tad negative wherever you loom these days…but if you could FIRE Jan 2018 you should still be FIRE Jan 2019.
While I think lean FIRE was oversold I don’t think we’re really in DIRE territory.
I thought the call on the interest rates was a bad one. Other commentors have touched on my points, so I don’t think I need to add too much detail. I will say that it’s hard to know what is in other peoples minds so on principle I won’t agree with Sam there.
The other advice about sticking it out is true. I don’t care if you are talking about a diet, learning a new skill, or well anything worth doing. It all takes time, and you will never be good at anything if you don’t invest in that activity. I am a baseball fan, and my favorite player growing up was the Yankees first baseman, Don Mattingly. I once had the opportunity to hear him speak when I was 11 or so, and he was asked for advice for the many youngsters in the audience. He said he practiced every day. Every day he was out hitting balls into his shed. It rained, he was out there; it did not matter. Sure, his natural abilities meant that he had one piece of the puzzle, but without the practice, he would never have made it.
What are your thoughts on home flippers like Opendoor?
Negative
Why’s that?
despite it all…you are still an equity guy
Yes, about 25% of net worth. Disappointing. You?
I am older than you and I have gone from 20% to 8%. I did not actually lose money, but I have less than I used to have.
By the way, you are correct about JP. They could have raised rates and gone immediately to neutral for 2019. That does not stop them from raising rates. And someone mentioned pensions – the funds would be better of making gains from stock holdings the increased rates will just increase state’s borrowing costs.
There is nothing like an extra #100,000,000 to provide that buffer from the working folks.
Sam, why do you think Redfin will do better in Zillow? Redfin also started this year with Redfin now which is essentially a house flipping business. I know they don’t do lending, but given what you had to say about Zillow, doens’t the same apply to Redfin?
Thanks for the great read and the insights about the housing market, it was a lifesaver for me!
Oh no, are they? I like Redfin because I have put more pressure on commissions than Zillow with the rebates. The application is superior and their data is more up-to-date based on my experience.
Great post!
When the economy gets nervous, it’s hard to keep a clear head. Some of us have a plan B for the tough times, others sale where the wind carries.
Good remark about blogging as well!
Hi Sam,
With the market declines I’ve been evaluating some of my past self inflicted wounds relating to stocks. Most have been hanging on to stocks I never should have bought in the first place and selling stocks I completely believed in but sold because of price fluctuations and not fundamentals.
I’m trying not to make those mistakes again. I’ve sold my garbage and keep buying my conviction stocks. Yes, I’m currently getting killed, however I do know that eventually things will change, and when they do I will be rewarded more than any of the previous downturns I’ve been through.
“We know that most politicians on both sides are egomaniacs who are primarily focused on obtaining and maintaining power for themselves.”
When they all are concerned more about reelection than anything else that means they all have the same goal. When they all have the same goal it becomes very hard to distinguish their actions of one from another.
Consider where they come from, too. Most are rather wealthy to start with (and they started young, which hints at unearned wealth), and 1 in 13 are one percenters. As for the rest, imagine coming home to your family while (or when) you were young and telling them money was going to be tight because you were quitting your good job and, also, that their time with you thereafter would be much more limited as you were going to be running for public office for a year or two. Who does that? Is that responsible behavior? Is that someone you want spending your tax dollars?
Congress was never meant to be a place to go to when you were young and come out when you were dead, or close to it. It was meant to be a term or two of service, a sacrifice, after which people were expected to be eager to get back to their neglected farms, shops, manufactories, legal practices etc.
Now we have “career” politicians (of which something more than 45% are attorneys) that spend over 60% of their time (their time that we pay them for) just in seeking out more campaign contributions. And since most of those contributions come from a very small subset of the population, that is who they are going to work for. Everyone else they just “handle.”
The fact than any bill, regardless of how popular or unpopular it is, has about a 30% chance of passage, gives another hint as to how bad things have gotten.
Sam, Great post! Really enjoyed it. Don’t be an a-hole and no upside to harassing anyone are true, but sadly forgotten often. I view it as being a good citizen. For the workplace that means doing your work and not causing too much of an uproar, being kind, and generally likable.
It’s hard to understand why anyone would want to telegraph continued rate hikes in 2019 in the December we’re having.
I guess it’s a good time to stage some of the cash to buy back in if things start to really slide.
I guess the Fed’s job isn’t to better the daily or monthly performance of the stock market, eh?
Confounding to me that people would conflate daily returns with the Fed’s responsibilities. The Fed is paying attention to inflation, manufacturing, employment, trade & fiscal policy.
The government entity that needs to grow up and act like a responsible adult is the PUSA. “The December we’re having” is traced directly to the market reaction to pusa’s policies.
He’s trying to engineer a soft landing.
Of course almost every other attempt seems to have crashed and burned horribly…even Greenspan who managed to in ‘94 blew it in 2000.
With employment where it is, he’s probably doomed to overshoot.
Still, he’s gotta try because if he lets it implode with rates low he’s got no real levers at all.
On the plus side for nervous FIREs with unemployment so low if they get back in right now they can likely find a job they like.
This is an awesome read. The real enemies are easy to figure out and have a counter measure against them. You can also avoid them. Our worst enemy is ourselves. Many don’t realize it until it’s too late. And it’s not like you can avoid yourself.
The social media one is especially important. Everytime I see people get fired for saying something stupid, it blows my mind. Many were adoring awesome before then. Only to crash due to few words on social.
I also second quiting at the cusp of success. I think the newer generation have been accustomed to overnight success they see in the tech companies. We want that instant gratification. You do eventually hit a homerun if you are persistent and keep adapting and learning the business. I was reading a motivational video on entrepreneurship and it emphasized outlasting your competitors is a key ingredient to being a successful entrepreneur. With that mindset, you are more likely to succeed.
Love your content. Bookmarked.
Great post Sam and so true. The rate hike sure seems to have backfired. And the state our country’s politics is in could be so much better too. Hopefully things will improve next year. But if they don’t I’ll do my best to continue to leg in while prices are down, work harder, save more, and stay focused on my long game.
Hi Sam, piggy-backing off of one of your listed “wounds”, what length of time would you consider to be job-hopping? Less than 2 years? Less than 5 years? Just curious to hear what you think. Thanks!
JP has to raise rates to throw the pensions a bone. It’s too late for them actuarially. Even if rates are raised to 5% the damage of a decade of ZIRP has mortally wounded them already.
The trap is that if rates are normalized then the USG has exploding deficits if the short end goes from zero to even 2% as we see now.
There’s no way out. It’s a sovereign debt bubble. The rush for Prime Tier Naught collateral is on. Get you some.
This is the real worlds and these wounds have real consequences. Just in the past week, a man living near me in his 40s with two children in elementary school killed himself because of financial problems related to this market. The shame he felt at his mistakes was too much. Of course he didn’t think and do not presume to believe you would think if things ever came to that. Don’t go there.
Some good examples, though I’d take exception to your characterization of Jerome Powell.
You said he made his decision based on “pride” and because he “feared being viewed as a puppet to Trump.”
One could argue he made his decision based on his best interpretation of the data. Surely that is what we would hope a Fed Chairman to do, rather than focus on what “his rich friends at the country club” would think.
I have to agree with you Fed watcher. There is nothing to indicate that JP based his decision on a desire to not be viewed as Trump’s puppet. On the other hand, there is definitely data that suggest that the US economy is still strong, although slowing slightly.
Second, assuming perfect causation, the Fed only caused another 2/3% loss. We were already down 10%. Blaming the Fed for the correction – or even the bear market now – seems wrong.
I also didn’t get the “rich country club” reference. Those people are probably rejoicing at the downturn so that they can buy stocks at a discount. They are the ones with the fire power to do so.
That and JP’s job isn’t to provide the best return in the market. It’s to keep the US at full employment and inflation at ~2%. If his data is pointing to inflation still creeping upward, it’s his responsibility to keep that in check. There is also the probability his decision might also be based in part of getting tools back in the tool box. If the fed dragged their feet on unwinding their balance sheet and not raising interest rates, they’d have very little power to help in the next recession.
With the stock market selling off, layoffs on the horizon, real estate prices weakening for a year now, what are some of the inflationary indicators you are most worried about that warrants continued hikes in rates? Thanks
College.
Thanks.
I have to agree with the field on this one. I can’t say what inflationary indicators concern me with any authority because I lack the data, but I would like to the think the Fed Chair has the data and knows how to interpret it. I also don’t understand what other motive JP would have for raising rates if not based on economic data. It’s not like he wants the stock market crash – he knows that the falling market will cause people to give him heat for his decision and who wants to deal with that? Making the tough call in a strong headwind is what you hope your leaders are willing to do if they believe it’s right, not bend to the will of the public.
I also don’t understand your assumption that a falling stock market = economic downturn = layoffs on the horizon. Maybe it’s a leading indicator as people feel less wealthy and therefore spend less, but they are not inextricably linked. You can have economic growth in a falling market if P/E ratios are contracting. As Buffett likes to point out, price does not equal value.
Sam: unemployment heading to 3.4%?
Where are those layoffs on the horizon? There will always be mismanaged companies that will be laying off, especially after gorging up on cheap debt based on ludicrously low interest rates for a decade. Should we prop them up just so we can keep the stock marked and the real estate bubbles elevated?
What about pension funds and savers who are getting killed by the low rates?
Tariffs, especially if the range of goods subject to tariffs is expanded or if they are increased to 25%.
What are some specific tariffs that have raised your prices for you?
I haven’t been able to feel the effects of tariffs.
Strongly agree with you, Fed Watcher.
Sam’s inclusion of Powell here is out of place, on many levels.
Feel free to elaborate. It’s fun!
It doesn’t matter what prompted his decision to have two more rate hikes next year, be it ego or financial data, and the end result is Jake Powell is now one of the most hated men in the world for now. He needs to get on TV ASAP and walk back some of his comments. It is depressing to see the Fed is also always late in his/her action regarding rate hikes and cuts and the economy suffers greatly as a result of their collective stupidity. You would think that those PhD economists at the Central Bank at least are a little bit smarter than the average Joe. The actions and the subsequent results time and time again prove otherwise.
Hi Sam,
Great article!! You bring on a lot of great points. During this time of stock market volatility, risk management is even more important. I’m not sure if you’ve heard about the people at optionssellers.com. They were writing naked calls on natural gas and naked puts on oil. They didn’t have a proper risk management process in place, they thought the likelihood of drastic jump in nat gas was very small. Writing naked calls has theoretically unlimited loss potential. When I first heard about this I heard the losses was around $290 million, recently I heard the number is around $150 to $200 million. Some of his clients ended up owing money on top of what they lost. Scary stuff!!!
Here is the youtube of James Cordier’s apology to his clients. https://www.youtube.com/watch?v=VNYNMM0hXXY.
With respect to the giving up on the cusp of success… I definitely agree with what you said but I think some people mistake not giving up with irrational perseverance or stubbornness. I’ve seen put their head down and plug away and miss all the telltale signs. There is a time to stick it out and a time to pack it up and try something different. Sometimes its difficult to tell which time it is.
Ernest
Thanks Sam for a very timely post. I share the exact sentiments about the fed telegraphing interest rate hikes in 2019. There was absolutely nothing to gain by doing this and now that it is out there the markets have reacted as expected downward.
Thank you also for the tip on blogging. It does seem that a lot of people give up very early in their attempt to maintain a blog, with most blogs lasting 6 months or less. My blog is now 8 months old and as you said, the more you put out there, the more traffic you get.
It seems that if you can get to 2 years blogging (which is definitely not an easy to thing to do), you start gaining momentum and increase your odds of having a long lasting blog. That’s my goal anyway and I hope it is the case with me.
Another example of a self-inflicted wound would be the high burn rate and expanding way too much at an early stage like Realty Shares. They could have had a great thing going and would have organically grown into probably the largest crowdfunding platform but like Icarus they wanted to fly too close to the sun too quickly and fell to earth. That was probably the saddest example of 2018 for me.