GOOD's Slow Issue

GOOD Magazine - The Slow Issue

Q&A with Aubrey de Grey.

GOOD discusses building things that last with Saul Griffith. He's spoken at TED a few times; short and long.

Architecture that forces you to be more active. This is something that I think about fairly often. Our society is so ridiculously good at removing all physical activity from our daily lives; we don't have to scrub our clothes, climbing stairs is done by escalators and elevators, our walk or bike to work is easily done by train and car, etcetera. It's so hard to find physical activity that we design special buildings where we go to run in place and lift heavy objects for no real purpose. It's kind of hilarious and sad at the same time.

Interesting take on investing locally from GOOD. They promote investing locally in socially responsible businesses and being involved with local agriculture which according to them generally comes with a steadier 4-5% interest rate. Hm. Study after study has shown locavorism (eating locally) to be worse off for the environment. Not that I'm entirely against it, just that I think people go a bit too far in requiring all their food be sourced locally. The reality is that our food delivery system is just incredibly efficient and the energy involved in transporting food makes up a really small percentage of the total energy needed to create that food. I do support investing in a socially responsible way, but that's a tricky one. It could probably be reasonably argued that the higher interest rate that most people expect (7-9% as opposed to 4-5%) is just a negative externality being shoved off on someone/thing else that you are then capturing. So really isn't the solution to change laws regarding negative externalities? Basically you're getting left in the dust by those that are willing to play the grey area. And of course it's not that simple, but usually doing the right thing pays off. Who gets the benefits is the question and my argument is that it should go to those doing the right thing.

The Rule of 72... or 70, 69.3

If you have no idea what that title means then I guarantee (ironic global and personal events withstanding) that this is the most important thing you will learn today.

This is something my dad talked about constantly since I can remember, so when a lecturer at IIT today stated the "rule of 70" I chuckled to myself with my usual dorky demeanor. It was one architectural PhD talking to a bunch of other MA's and PhD's who don't know basic finance... which is of course why they design the objects that contain more of humanities combined wealth than any other profession by far. But that's not the point.

The point is that I wanted to know why he said rule of 70 and not 72. Upon further research I learned all sorts of cool things, and as usual Wikipedia and a subsequent Google search taught me more in fifteen minutes than I learned all day at my fancy school (sorry school, I still love you and your sweet sweet buildings and wood shop).

The rule of 72 is a quick and fairly accurate way of determining how long it will take an investment to double. Simply divide 72 by the interest rate and the result is the amount of time it takes the principle to double due to compounding interest. For example: if you are receiving an interest rate of 8% on $1 it will take 72/8 = 9 years for that dollar to double. Simple enough.

Here's the actual calculations (from Wikipedia):

Rate ↓ Actual Years ↓ Rule of 72 ↓ Rule of 70 ↓ Rule of 69.3 ↓
0.25% 277.605 288.000 280.000 277.200
0.5% 138.976 144.000 140.000 138.600
1% 69.661 72.000 70.000 69.300
2% 35.003 36.000 35.000 34.650
3% 23.450 24.000 23.333 23.100
4% 17.673 18.000 17.500 17.325
5% 14.207 14.400 14.000 13.860
6% 11.896 12.000 11.667 11.550
7% 10.245 10.286 10.000 9.900
8% 9.006 9.000 8.750 8.663
9% 8.043 8.000 7.778 7.700
10% 7.273 7.200 7.000 6.930
11% 6.642 6.545 6.364 6.300
12% 6.116 6.000 5.833 5.775
15% 4.959 4.800 4.667 4.620
18% 4.188 4.000 3.889 3.850
20% 3.802 3.600 3.500 3.465
25% 3.106 2.880 2.800 2.772
30% 2.642 2.400 2.333 2.310
40% 2.060 1.800 1.750 1.733
50% 1.710 1.440 1.400 1.386
60% 1.475 1.200 1.167 1.155
70% 1.306 1.029 1.000 0.990

72 is used because it's the multiple of many numbers and hence easy to use. The "appropriate", if that's the right word to use (pun definitely intended), number to use is 70 because ln(2) = 69.3; rounded up. Although it depends on what interest rate you're working with. For the numbers I tend to use, say... the real rate of return on an investment in the stock market which is about 6-7%; 72 works best. For small numbers use the others.

Use that link above and play with the stock markets numbers. I learned quite a bit. I did 1955-2002. My thinking was an era post-WWII and the boom afterwords and the period before we went totally nuts in the last few years. Average rate of return? About 10.6% (this is the geometric mean, not arithmetic - there's an explanation on the site and the number I give is far more accurate) and when it's adjusted for inflation the "real" rate of return is about 6.3%.

72/6.3 = 11.4 years

The take away from that is this. Say you have a kid and you decide it'd be nice if one day they had money to give their kids, you know, patience and forethought. Well, if when they were born you set up an IRA (savings account that doesn't get taxed) and put in a $100 bill by the time they could withdraw it at 59.5 it'd be worth roughly $40,000. Keep in mind this is already adjusted for inflation. So say you skipped buying that Acura and instead bought the Toyota and put the savings of roughly $15,000 in that account (over several years, you can only put in $6,000 a year currently) and they didn't withdraw it until they were 65.5 (using the 1871-2008 geometric mean of the average rate of return on the US S&P 500 adjusted for inflation which is 6.6%). They'd have $960,000 (again, in present value) tax free. That's a truly conservative estimate based off of the largest sample size available to anyone is the US that I'm aware of.

Capitalism may be brutal and inhumane, but over the long run it certainly doesn't have to be. Just think of how you live now - and the giant's shoulders we stand on to do so. The rich get richer because they know simple financial tricks like the rule of 72 that enables them to create a mental picture strong enough to allow them to invest in something that they will most likely never see come to fruition. But in the long run... $15,000? That was my tuition this semester. When we spend money in the present it has a great effect on the future that few ever give thought to. My decision to go to grad school is essentially me saying "with the knowledge I gain here I will effect the world in a more significant way than if I were to invest the money (3 years at over $30K per year) and bequeath to six people of my choosing one million dollars apiece in roughly 65 years." Understanding this relationship adds new meaning to these actions, or detracts it if you consider what most people spend their money on.

So yes, that's why I wear Hanes white tees and bring my lunch to class.

Interesting Charts

As an odd point of clarification that has almost nothing at all to do with this post; when I took economics classes in college we never really discussed political views regarding economics. Things like "The Chicago School" of economic thought and free market versus socialism were really just never discussed. I suppose we did talk a bit about government intervention. Mostly we figured out how changing one variable in any given situation would trigger a change in other variables. On tests we would be expected to know how to "create an economic story" and show the changes graphically. Most of it was just studying the history of economics which is really like... the last 100-150 years. I'm sure economists will be better prepared for future crisis's in the next 100 or 200 years when they have better data. Then again by that time I'm sure computers smarter than our (current) selves will be running the show (another subject I know).

Here's a typical page of my notes... don't worry, they're confusing to me (now) too. These 3 charts, that are really one, has to do with floating currency.

This is interesting just because I consider myself to be somewhat "informed" in terms of economics and what not yet was unaware at just how much the various indexes have lost in value. Aside: look at the REIT's (real estate investment trusts) in pink!

This is interesting on several levels. The red line in the center gives the inflation adjusted cost of buying a home. Thus, if you purchased real estate in 1979 it's worth about the same as what it's worth today plus inflation... think 3% a year. This of course isn't the case if you bought in a "hot" area where prices increased dramatically. There are positives (tax deductible interest payments, you get to live there, one of the few investments that's protected from inflation) and negatives (upkeep, generally poor appreciation, highly illiquid, and high transaction costs if you sell) to owning a home, but it is worth mentioning that it isn't a crazy idea to rent and invest the excess money you would have been paying on a mortgage. Then again, in a country with a (previously) negative savings rate, who has the will power to do such a thing?