This article originally appeared on Fool.com
WASHINGTON, DC — Finance doesn’t have to be hard. You just have to think of it in simple terms.
How to think about market volatility: Pick a million random people from around the world every day. Some days, 51% would be in a good mood, 49% in a bad mood. The next day maybe it’s the opposite. Other days, random chance could mean 8% of people are pissed off for no explainable reason. This is basically what the market is on a day-to-day basis.
How to think about hedge funds: Probably 100 are legitimately talented and can consistently beat the market with below-average volatility. They won’t take your money. The rest charge ten times the fees of mutual funds for half the performance of index funds, pay half the income tax rates of taxi drivers, and have triple the ego of rock stars. Basically a conduit between public pension funds and private jet brokers.
How to think about (many) economists: A car mechanic who says your air conditioner is fixed if you just assume there’s cold air coming out of it. Your car doesn’t even have an air conditioner. This doesn’t change his opinion.
How to think about recessions: Everyone wants to see Kobe Bryant play all game. But sometimes he can’t. You’ll wear the poor guy out. He needs to sit on the bench once in a while. The sponsors will say, “You can’t do that! We don’t make money off him when he doesn’t play!” They’re right, but only in the short run. Everyone – the team, the fans, the sponsors, and Kobe himself – will be better off in the long run if you let him take a break once in a while. He needs to rest his overworked knee and learn from the mistakes he made last quarter. Don’t worry; he’ll be back.
How to think about IPOs: There’s a new movie out. It looks awesome. You can go see it opening night but the lines are probably really long. Or you can wait a few weeks, go see the same movie, without the crowds, and pick a better seat in the theater. Do that.
How to think about dividends and capital gains: Dividends are your annual salary – pretty steady and even, and you should consider it a huge part of your overall pay. Capital gains are your Christmas bonus – big some years, nonexistent other years, and no one will feel bad for you when it’s volatile.
How to think about pundits: People who profess to have knowledge about things that can’t be known. Combines the skill of an actor, the ridiculousness of a comedian, the believability of priests, and the credibility of politicians.
How to think about margins of safety: You’re building a foot bridge. You can design how much weight it can hold. The heaviest you’ve ever been is 165 lbs. An engineer says, “Let’s build it to hold 166 lbs.” You think that’s crazy, and say it should be able to hold 250 lbs. The engineer doesn’t understand. After a freak illness causes you to put on 50 lbs., he gets it.
How to think about Warren Buffett: If Michael Jordan looked and sounded like such a normal guy, you’d think you could dunk from the free-throw line, too.
How to think about economic data: Ideally we’d have 500 years of unimpeachably perfect data. In reality we have about 50 years of so-so data. If we had the former, we’d learn that so much of what we’ve learned from the latter is wrong and incomplete.
How to think about patience and investing: A guy pulls grapes off a vine, smashes them in his hand, drains the juice into a cup and says, “This wine is awful.” Someone tells him he needs to let it age first. An hour later he says it still doesn’t taste like wine, and gives it to his friend. His friend stores it in his basement for 20 years and has the best wine you’ve ever tasted.
How to think about long-term investing: The labors of your past self work hard while your current self does nothing so your future self will be better off.
How to think about compound interest: Little slaves that work for you while you sleep and breed like rabbits.
How to think about chart patterns: Palm reader with an Etch-a-Sketch.
How to think about bubbles: The masses lose their minds ever 10 years. Afterwards, you fool yourself that you won’t lose yours 10 years from now.
How to think about bull markets: Most businesses, CEOs, consumers, and countries wake up in the morning wanting to do a little bit better and make the world better off. Rising stock prices over time reflect their progress.
How to think about bear markets: They overdo it sometimes. Not a huge deal. Everything that lives and breathes needs a break once in a while. Let it rest and wait for it to get back in the game.
How to think about people who disagree with you: Guy from Minnesota says it’s cold in the winter. Guy from Mexico disagrees, says it’s hot in the winter. Both have a hard time realizing they’re each right based on their own unique life experiences. They call each other idiots in the comments section of news article that has nothing to do with weather.
How to think about the intersection of politics and investing: As little as possible.
