How to screw up your life?

Enter a bookstore or library, and you'll likely find lots of books with titles such as How to Lose Weight, How to Win Friends and Influence People, How to Read a Book, How to Improve Your Marriage, How to Make Money in Stocks, How to Raise a Puppy, and so on. There's lots of advice available on how to enrich your life. Thinking about this recently, I realized that there's a gaping hole in this area: a dearth of books on how to screw up your life.

Now you may be thinking to yourself, “Well, who would want to live a less comfortable life?” Believe it or not, I’ve an example. You may or may not have heard of Simone Weil. She was an upper-class French intellectual and activist who, feeling too privileged, chose to work in factories, lived on a tiny income, gave much of her money away, ate much less than most people, and often slept on the floor, even when there was a bed available. Many may think she is bonkers to do that. But actually, she’s rather inspiring despite her peculiarities.

However, I’ll concede that most of us, including myself, do not want to make our lives any worst off. Despite that, though, we often do things that will indeed screw our lives up. Here are some “nos-nos” which one ought to look out for so that you can stop committing them if they apply to you.

1) Racking up credit card debt. Credit card debt is reverse-investing. Whereas you might earn 10% or so in a stock or fund in a year, credit card issuers are perhaps earning 20% (or more!) on you in a year. Instead of a little money in, it's a lot of money -- out. Fortunately, you can dig yourself out if you recognize the danger within early.

2) Not investing. I can see how it happens. You figure that things will somehow work out well in the end. You think there’s always the government Social Security like CPF, after all. But will it be around when you need it? Even now, according to the CPF system, at the retirement age, you cannot draw out all the cash in the ordinary account, you will only be given a certain monthly allowance based on your balance. Will that be enough to sustain me? I think not. Can I count on a pension to help out? Nope. That's why I'm saving and investing as much as I reasonably can. And starting as early in life assist greatly in the formula of compounding.

3) Delaying your investing in earnest. Each year that goes by without your investing for the future can have a big effect on your nest egg. That's because your most powerful dollars are the ones you invest first, because they have the longest time to grow. Fortunately, it's rarely too late -- or too early -- to start.

4) Having unrealistic expectations unless you have the right fundamentals. Even if you have the right fundamentals, expectations on returns must also tie up with what is reasonable with the kind of fundamentals. If you are a growth player, the historical return is about 8%, if you are a value player, it is about 11%, and if you are a basket-investor in indices, it produces roughly 8% as well. That is the benchmark. The S&P 500 advanced 24% in 2003, but if you think you'll see that kind of result every few years, think again. The market's long-term historical average is around 6 to 8%, and in many years, it will deliver low-single-digit returns or even occasional negative returns. Still, over the long haul, it should do well.

5) Not being patient. Real wealth for most of us grows over decades, not days or even single years. If a company is growing steadily, if it has competitive advantages, and if her financial statements are strong, then don't worry if its stock has stagnated. The stock will catch up to its true value, eventually.

6) Following the herd mentality. One of the sustainable ways to long term success in investing is to recognize the folly of others. Buy when others are fearful and sell when others are greedy.

7) Trying to predict the behavior of others. Here the wisdom of Warren Buffett speaks clearly: “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable.” A market downturn is in fact an opportunity to increase ownership of great businesses. It is silly to head for the door when things get cheaper. Investing is the only field where such foolishness happens where on the whole, investors sell when things are cheaper instead of buying when things are cheaper.

8) Using the “Gin-rummy “behavior in investing. It is detrimental for investors to try to slot in and out trying to profit by jumping from flower to flower. It is impossible to do reasonably well if one try to flip-flop in and out of every individual business which are hot at a certain point in time.

9) Getting too weighed in by the general prospect of the current economical state. Years ago, no one could have foreseen the huge expansion of the Vietnam War. In the 1990s, no one could have expected the invasion of Kuwait by Iraq. Who could have predicted the oil shock in the 70s, the resignation of a president, a one-day drop of 508 points in the Dow, or the fluctuation of the treasury bill yields between 2.8% to 17.4%? But surprise, none of these blockbuster events made the slightest dent in the basic fundamentals of Benjamin Graham fine investment principles. A different set of major shocks will sure to happen but none of these should cause an investor to fluster and try to predict nor profit from them.

10) Being irrational. Nothing sedates rationality like large doses of effortless money which happens in a bull speculative market. The line separating investment and speculation is never bright and clear for most people, especially after the market participants have enjoyed recent triumphs. After such a heady experience of this kind, normally sensible people drift into behavior similar to that of Cinderella at the ball. They know overstaying the party – that is continuing to speculate hoping there will be some other fools to come by paying a higher price – will bring nothing but pumpkins and mice. Unfortunately, in this party, there is no clock on the wall.

11) Inability to differentiate price from value, or book value from intrinsic value. Price is meaningless in the measurement of value. Each dollar worth of asset is different from another dollar worth of a different asset. Every asset’s ability to generate revenue or profit varies. Therefore, the book value is an inaccurate measurement towards intrinsic value which makes book value meaningless.

12) Failure to control your temperament. In investing, more than anything else, intellect is secondary to having the right temperament. What has gotten many people – including many geniuses – into trouble have been the failure to control the urges that got them into trouble. In life, you don’t have to swing your bat at every ball that comes by. Only swing at the few fat balls which you understand and bet big when such balls are thrown by. The problem with many is the inability to sit around doing nothing when doing nothing at many times proved much better than to do something. I wish someone could have written the rule in investing stating: “As motion increases, returns decrease.”

Just a little time spent reading and learning about financial matters can make your future years far, far more comfortable. Solutions might not even be as complicated as you fear. Consider, for example, target-date mutual funds, which are rising in popularity. Each is designed around a specific retirement date, and its investments are chosen with that date in mind. The Vanguard 2025 (VTTVX) fund is for those who plan to retire in 2025. It recently had 79% of its assets in stocks and 21% in bonds, whereas its Vanguard 2045 (VTIVX) counterpart had 90% in stocks and 10% in bonds. See what's going on? The fund takes care of shifting your assets as you get older -- it adds more bonds in later years.

If you'd like to learn more about how to set yourself up for as cushy a retirement, it is important to recognize the foolish of others and why are certain things structured in a certain way. If you cannot make sense of things like how the Vanguard funds are structured, it is best to stay out.