By Brad Thomason, CPA
 
Consider the following two yet-to-come events: the 2020 presidential election, and the construction of a new bridge over your favorite-est river.
 
If you go to a civil engineer and ask her who she thinks will win the election, she can answer your question.  But the answer will simply be a guess.  Humans can’t predict the future.
 
On the other hand, if you ask her for a bridge design which will support car and truck traffic, she can give you one.  And when you build it according to the design, it will do the job as expected.
 
So how is it that the engineer can predict one future event, but not the other?
 
Because the bridge thing isn’t actually a prediction. 
 
There is a special category of situations out there in the world which are said to be “deterministic.”  That’s the fancy word the philosophers hung on them.  Essentially, a deterministic system is one which will play out in a definable, mechanical way once the initial conditions are set.  There is a rigid adherence to identifiable factors that is so consistent that it doesn’t matter whether they have happened or not.   
 
If the hammer strikes the nail, we know what is going to happen to the wood beneath.
 
If your cat knocks your coffee cup off the kitchen table, there’s no mystery to what comes next.
 
If a lever of x length needs to lift an object of y weight, then the lifting force will have to be z when the fulcrum is two feet away.
 
If we need to put a rocket into space and then bring the people inside back safely, then we gotta start doing math involving thrust and velocity and rate of oxygen consumption and heat shield thickness.
 
But in all of these, we can know how they’re going to play out beforehand.  In fact, so much so, that we don’t even have to actually play them out.
 
Notice that all of these examples are of a type that you would commonly find in a high school physics classroom.  That’s because the version of physics taught in high school is essentially the mechanics of deterministic systems (i.e. Newtonian physics; not relativistic, nor quantum mechanics).
 
There are aspects of finance which are deterministic, too.  If you have $400 in a bank account and you are spending $100 a month, then you can keep that up for four months.  If you bought insurance for a particular event, and it occurs, the policy will pay whatever was described in the contract.   
 
But there are a lot of questions in finance which aren’t based in determinism, too.  Failure to realize (and respect) this most-important distinction leads to a lot of the problems people run into when trying to plan and manage their affairs.
 
Once you move past CDs and Treasury bonds, returns start to become less deterministic.  That’s the basis of why they are considered to be riskier.  Because they may or may not occur as planned. 
 
Inflation rates aren’t deterministic.  Your future medical history is not deterministic.  The degree to which a family member might need financial assistance is not deterministic, and so on.
 
In the face of this, we have to make plans on the basis of what we deem to be plausible possibilities.  Then, as the future becomes the past, we have to look to see how well reality matched up to what we guessed was going to happen (because make no mistake: no matter how hard you work at it or who does the projections, it’s still just humans making guesses about a future which can’t be predicted).  Based on what we discover, we may have to reset and modify the plans we started with.
 
What we shouldn’t do is respond to the fact that we can’t predict the future by trying to get someone else to predict it for us.  Because someone else can’t do it either.  In our next post we’re going to address the common things an expert can do for you.  But let me go ahead and give you the punch line: being an expert does not confer the ability to predict the future.  Experts are still humans.  Can’t fly.  Can’t teleport.  Can’t predict the future.  No aliens, no X-men, no nothing.  Just people, just like you.
 
Life would be easier if more of the big financial questions dealt with deterministic systems.  But they don’t.  So we have to take the handful of easy answers where we find them, and spend the remainder of our time and attention dealing with the world – and the future – as it is, not how we’d like it to be.

​By Brad Thomason, CPA
 
As an Auburn grad, I find myself in the relatively unfamiliar territory of caring what happens in the upcoming NCAA tournament.  In my 30+ year association with the Tigers, I’m not sure how many times we’ve been here.  But it ain’t been many.
 
Nonetheless, you would have to have been living under a rock to not be aware of how much hoopla and excitement surrounds the tournament every year.  It’s a big sporting event that hits the calendar at a time when not a lot else is going on.  But that’s probably only half the explanation.  The other half seems tied to the widespread love of prognostication that ramps up this time of year.
 
Everyone seems to have an opinion – an expert opinion, no less - on who will be seeded where; and once the official list is in, everyone has their version of how the games will play out.  So much so that the games themselves almost seem incidental, at times.
 
You can even Google the invented word “bracketology,” a straight-forward reference to the bracket structure used to illustrate the tournament participants, and find an astounding amount of information.
 
Well, you can find an astounding amount of content.  How much information is there, is questionable.
 
You see, humans can’t predict the future.  So when a bunch of humans get together and start talking about what is going to happen, then it bears remembering that it is all, in the end, just a bunch of gibberish.  It has no impact on reality.  There is no authoritative weight behind any of it.  Things like insight and faith and certainty don’t have a place here.  It’s all just guessing.  No matter the supposed rationale.  No matter the track record for having guessed right in the past.  No matter the resume of the person doing the guessing.  Still just guessing.
 
Since the subject matter is basketball, it’s OK.  It’s all just for fun.  There are no consequences for being wrong (or at least they are limited to the size of your bet, if you put your money where your belief was).
 
But if we start to apply similar behavior in other areas then the situation can be a lot different.  If we start to think that we (or some other human) can state what the stock market is going to do, or where inflation rates will be 5 years from now, or how many years we’ll be able to dodge a trip to the hospital for a serious matter, then we are basing our expectations on something that is very flimsy.
 
We’ll have more to say about future events (and the viewpoints of experts) in later posts.  But for now it is sufficient to focus on the core point.  Spend all the time you want reading articles, listening to interviews, and working the voodoo on your own version of how the bracket will play out. 
 
But don’t lose sight of the fact that it’s all just guesswork, no matter who it’s coming from.  Doesn’t matter how much they know about basketball.  Doesn’t matter how flashy their production studio is or how much money they spent using computers to come up with the predictions.  Still just humans guessing.  Humans who can’t predict the future. 
 
And more importantly, when you get ready to switch focus to the more serious topics of your life, don’t be fooled into thinking a fun, play-time activity is a good model for how deal with future events which actually will have an impact on your life.  Because it isn’t.

By Brad Thomason, CPA

​
When you stop and think about it, isn’t all of personal finance really just an aspect of retirement planning?  Every dollar you earn, or don’t earn, or spend, your entire adult life, impacts how things go when you reach retirement.
 
We all start out on pretty similar tracks, if for no other reason than we are all supposed to go to school for the first couple of decades of our lives.  One ten-year old’s day looks pretty much like the day other ten-year olds are having. 
 
Then we split off and go in lots of different directions.  How a policeman spends his day is very different than the way an architect spends hers.  Veterinarians versus pastry chefs; teachers versus welders; bankers versus HR managers.  Lawyers versus anybody (everybody…).
 
But in the end, we all head back toward a similar destination.  Just like raindrops meandering back to where they came from in the first place, we all come back together, we all become more similar again, in retirement.
 
This is significant for a couple of reasons.  Warren Buffett has mentioned that he long ago got in the habit of looking at price tags as if they were ten times as much as the price listed.  He reasoned that he was about to use a dollar, which would someday be ten dollars, if he chose instead not to spend it.  Now, I don’t think you can go through life torturing yourself over “$50” fast food cheeseburgers.  But it makes a good point.  If you spend it today you can’t spend it tomorrow; nor will it have time to make any more dollars to keep itself company.  Is that thing you want today worth ten times what you are about to pay for it?  Because in the end, that may be what it costs you.
 
Realizing that it all fits together, and that today’s actions directly impact tomorrow’s resource base, is a good thing to think about if for no other reason than it’s true.  Knowing how your world works is important without any higher purpose, as a means unto itself.
 
It’s just that here you get both: the people who take time to think about this stuff are the ones who come to understand just how big a job we’re talking about.  Paying for what may end up being several decades of expenses, living just on your assets and not working anymore, is a pretty tall order.
 
Those who learn this early and keep it in mind as they travel through their career years have a much better chance of having the next period go the way they want it to.
 
I would not want to have to figure out how many different ways there are to drive from Jacksonville to Seattle.  It would be a big number, I’m sure.  But in the end, wouldn’t the governing factor be that we were headed to Seattle?  The particular route that’s chosen still ends up in the same basic spot.
 
Financially, assuming we live that long, we are all headed to retirement.  We don’t have to be pre-occupied with it every second of the journey.  But remembering that it’s what we’re doing is still a good idea.  Periodically stopping to check the route has obvious benefit.  The Maryland/Pennsylvania line may be a long way away from Jacksonville.  But if you’re about to cross it, it’s best to realize that turning left is likely a better next step than continuing straight.
 
Well, I think that mixes up the metaphors enough for one day.  So I’ll leave you with this.  That classic book about the habits of highly effective people suggests that you start with the end in mind.  Your end is retirement.  Which I know, because that’s the end for all of us.  You are working toward it whether you realize it or not, and whether you mean to or not.  So I thought I’d just point that out.