Personal finance is a really confusing place.
Every day you see completely opposite takes on the same topic.
For example, I can’t tell whether bitcoin is a worthless snippet of binary code that is destroying our planet OR the only reasonable investment in a world where the Federal Reserve is producing fiat currency faster than yeast multiply.
Similarly, I have no idea whether the government has so much debt that our taxes will be massively higher in retirement OR whether we are just a couple of Senators away from Universal Basic Income.
Does anyone actually know what the hell is going on?
Of course not.
Reading all of these different storylines every day can lead to tribalism. How many arguments have you seen between a crypto “prophet” with a “luddite” on social media. And even if you haven’t chosen a side to support, it can be anxiety provoking for our brain to make sense of all of the mixed messages we see every day.
I recently read a book on “Liminal Thinking” that I really enjoyed. The tools presented in Liminal Thinking can help us examine these divergent viewpoints. I had a lot of fun using the tools in the book to look at some current personal finance “hot topics” and thought I’d share them with you in this post.
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- What is liminal thinking?
- What does liminal thinking have to do with personal finance?
- Liminal personal finance thoughts about stocks
- Are stonks really different from Dogecoin?
- What other topics in personal finance space need liminal thinking?
Note:Nothing in this post should even remotely be confused for financial advice. It’s a creative space to think “liminally” about personal finance ideas. Please don’t sell your house and buy Dogecoin after reading my creative rant. This article contains affiliate links to the book. If you buy the book after clicking on the link I get a small portion of the sale at no additional cost to you.
What is liminal thinking?
When I checked the book out from the library, I wasn’t exactly sure what “liminal” actually meant. (I’m sure my high school Honors English teacher is rolling in her grave). In case you’re vocabularilary limited like I am, Merriam Webster defines liminal as “being an intermediate state, phase, or condition”. It comes from the word limen which means threshold. So in that regards, liminal thinking can be thought of as thinking that can open a door to new possibilities.
David Gray’s book on Liminal Thinking explains the psychology of human behavior, primarily looking at interpersonal interactions you may find in an office. For example, he tells a story of an office with an unwritten dress code and what happens when an employee decided to wear colored shirts. Liminal thinking draws upon the work of William James‘ practices of pragmatism and Alfred Korzybski’s framework of general semantics. Gray uses many stories to illustrate different truths about human behavior. If you’re curious and want a quick overview, Gray lists the six principles of liminal thinking on his website.
As humans, we naturally make inferences on our observations and assume that we know how a system functions. David Gray makes frequent mention of the parable of the blind men and the elephant. Since we build a belief system based off of our personal observations, and there is more information than we can ever process in the world, it follows that our believes are based on only part of the truth.
Additionally, we tend to create “a bubble of self-sealing logic” and resist change. We interact with people that reinforce our beliefs and protect or belief system. Anyone who has spent 15 minutes on social media can immediately understand how this logic bubble works. Gray presents nine liminal thinking practices to help people who want to challenge their own logic bubbles and gain new understandings of the world.
What does liminal thinking have to do with personal finance?
Now that we established what liminal thinking is, you might wonder what it could possibly have to do with personal finance. Let me rip the Band-Aid off for you. Can we agree that the personal finance world is often a bubble of self-sealing logic? How many times have you heard things like
- Spend less than you earn
- Invest in low cost index funds (especially VTSAX)
- Giving up a latte (or craft beer) a day could make you a zillionaire if you’d just invest that money every day
- Once you save up 25x your expenses you can quit your job and become a personal finance blogger
Lest you think I’m trying to insult every other finance blogger, I’ve probably said the same things on my site somewhere. The point of this article isn’t to “slash and burn” all previous personal finance advice. Instead, I want to challenge us to examine the stories we tell ourselves about money. Perhaps by looking at the problems from another angle, we can come up with better personal finance advice. What happens if we “empty our cup” and “assume we are not objective”?
Can we agree that the personal finance world is often a bubble of self-sealing logic?
Example: That time I fought with a source for my blog :-/
For example, I recently interviewed a certified financial planner about tax on the FERS pension. We got into a minor argument about the article. The planner was convinced that personal income taxes will be much higher for everyone when they retire. He pointed out that our taxes are at historical lows and our debt is at historical highs. In his mental model, the national debt must be paid off and the only way to do that is by raising personal income taxes. In my article I brought up many reasons why income taxes might not go up. However, this conflicted with the planner’s beliefs about debt and taxes and he strongly rejected them.
I bring up this discussion not to point out who is right or wrong. Instead, I wanted to merely illustrate that personal finance “truths” are based upon a system of beliefs about how the economy works. We have built these personal finance pillars based upon macro-economic theories and observations developed in the 20th century.
However, we are living in a world where I made a 900% 1000% return in 6 weeks after “investing” in Dogecoin as part of a joke for a blog post. Try to explain that with your Macroeconomics 101 professor. I posit that perhaps the world has changed since the pillars of personal finance were developed. By thinking liminally we can “feel other parts of the elephant” and decide whether or not to follow the regular personal finance truths.
Read More: Can I buy crypto in my TSP?
Liminal personal finance thoughts about stocks
The mainstay of personal finance advice is invest in low cost index funds. Why? Because Peter Adeney and JL Collins told us to.
No. Seriously- Mr. Money Mustache and JL Collins are huge influences in my own financial path to wealth. I would not be nearly as wealthy as I am today if I had not encountered their writing. They’ve written very elegantly about why you should invest in index funds.
For example, Mr. Money Mustache’s argument for stock market investing can be succinctly summarized by this quote
The value of stocks will go up as the earnings of the underlying companies goes up. A portion of the ongoing earnings will always flow to the shareholders as dividends. And all this happens because of the natural ingenuity of hardworking humans making things at a profit, and continuing to advance our knowledge and technology and make us all more productive in every field.
Furthermore, index funds are the perfect investment because they are “self cleansing” as JL Collins so wonderfully describes
As new companies grow, prosper and go public they replace the dead and dying. The Market (and VTSAX as proxy) is self cleansing. Now let’s look at our top performers on the right. What is the best performance they can deliver? 100%? Certainly that’s possible. But so is 200, 300, 1000, 10000% or more. There is no upside limit. As some stars fade, new ones are on the rise.
I love this explanation of the macroeconomics (or “fundamentals”) of the stock market. However, this explanation fails to fully describe everything happening in the stock market in the 2020s. In the parable of the blind men and the elephant, this is just one view.
Another view of stocks
As any hedge fund manager will tell you, stock prices also depend upon “technical analysis“. In the short run, the stock price depends upon its recent trends in price and volume. Why? Because major investors believe it is so and create a self-fulfilling reinforcement loop.
You can test beliefs even if you don’t believe they are true. All you need to do is act as if they were true and see what happens. ~David Gray
I don’t want to write a big piece on whether you can make money just by looking at a stock’s chart. The point is that if you asked a professional trader how the stock market works, you might hear a lot of discussion of technical analysis. It’s another view of the elephant.
The elephant in the room
What these views of the market fail to mention is that index funds make up over 50% of money in the stock market. Furthermore, the federal reserve has kept interest rates near zero almost continuously since the 2008 housing crisis. During this time, stocks have reached all time highs and trade at a ridiculous Price to Earning Ratio of 43.
Is our current reality still consistent with Mr. Money Mustache’s stock market picture? Have things fundamentally changed?
In the book Liminal Thinking, David Gray states, “You can test beliefs even if you don’t believe they are true. All you need to do is act as if they were true and see what happens.”
Therefore, even though I don’t necessarily think it’s true, I’m going to tell a different story about the stock market and see what we can learn.
- Each week, millions of people throughout the US get paid and put a percentage into 401(k)s. Most of that money gets dumped into index funds indiscriminately.
- There is no “self-cleansing” of the index funds because the money is getting invested in all companies regardless of their profitability.
- The Federal Reserve has kept interest rates so low that it does not make sense to save money in “safe” assets such as CDs, savings accounts, or bonds. As a result, there is literally no where to put your money besides stocks (or real estate, which is also hot).
- Therefore, stocks aren’t a reflection of companies values but rather a reflection of a high supply of money and limited options.
As a result of crazy monetary policy and index fund investing, we’ve gone from a stock market to a “stonks market“.
Before you think that I don’t know anything about stocks, when I was a kid, I would go to the library with my dad as a kid and record P/E ratios in a notebook from the ValueLine books. Part of me hates the liminal thoughts I just wrote because it pains me to think that the stock market I grew up with might not be the stock market we have now.
As a result of crazy monetary policy and index fund investing, we’ve gone from a stock market to a “stonks market”
Are stonks really different from Dogecoin?
Before you come after me with pitchforks, I want to make it very clear I’m not trying to convince you to invest in Dogecoin. I don’t give financial advice. This is just an exercise in liminal thinking.
For now, let us assume that there was some truth to the picture of the stock market I just painted and stock prices are detached from company valuations. Stocks are going up because people have money to invest and no where else to put it.
People are starting to look at cryptocurrency as a legitimate investment. The rise in bitcoin adoption is roughly tracking at the same pace as internet adoption. The number one draft pick in the NFL draft put his entire $24M signing bonus into cryptocurrencies. Perhaps in another 10 years, cryptocurrencies such as Etherium, Bitcoin, and yes, even Dogecoin could be the next Google, Apple, and Amazon.
Now this is where I should bring up Mr. Money Mustache’s arguments against cryptocurrency as a proxy for rational personal finance advice. In his words, “[cryptocurrencies and other bubbles are] … driven to completely irrational prices, not because they did anything useful or produced any money and value to society, but solely because they thought they would be able to sell them to someone else for more in the future.” Which is true. I’m not disputing that.
But what’s the difference between an extremely overpriced stock market at P/E ratio of 42 and digital dog money? At a P/E ratio of 42, both only have value because there’s someone out there willing to pay more.
You might say Dogecoin doesn’t pay dividends. You know who else doesn’t pay dividends? Google and Amazon. When you buy a tech company like Google or Amazon, you are placing a bet that you will be able to sell it for more in the future.
But what’s the difference between an extremely overpriced stock market at P/E ratio of 42 and digital dog money? At a P/E ratio of 42, both only have value because there’s someone out there willing to pay more.
A very dogey future
Our liminal thought experiment suggests that cryptocurrency might not be as different from stocks as I used to think. The cryptocurrency market is on fire. I could easily envision a future where someone creates a crypto ETF. There already are ETFs for commodities such as gold and silver. In the near future people might buy Bitcoin in their IRAs and 401(k)s. In that case, what do you think would happen to the value of Bitcoin?
I admit that owning cryptocurrency is speculation at this point. But the question we should be asking ourselves is whether it is worth having a small amount of speculative money in cryptocurrency.
Just a few months ago, I thought Dogecoin was a complete joke. I bought some as part of an experiment for this blog and promptly forgot about it until my friend texted me and was like “dude you’re rich if you actually bought Dogecoin”. My Dogecoin investment increased by over 1,000% in a few weeks. I had only put some “beer money” into Dogecoin as a joke for good fun. Could you imagine if I had put just 1% of my portfolio into Dogecoin? It would have been a life-changing amount of money.
We don’t know what the future holds. We invest our money based upon our system of beliefs. As David Gray points out, since we create our beliefs, we can not judge them objectively.
The common personal finance advice to avoid cryptocurrency like the plague may be the best advice. Or its possible that despite the fundamentals, cryptocurrency becomes part of our future economy.
I don’t have any insights or advice for you on what you should do with your money. However, I do recommend trying to use liminal thinking when reading personal finance advice. We should all try to find the implicit assumptions in the authors’ arguments and then test them.
I don’t have any insights or advice for you on what you should do with your money. However, I do recommend trying to use liminal thinking when reading personal finance advice.
What other topics in personal finance space need liminal thinking?
Did you enjoy this article? Tell me what you think on Twitter and smash that subscribe button. Do you think I’m totally wrong? I probably am. You can tell me how wrong I am only in the form of an epic poem submitted to my email. Curious about Liminal Thinking? You can buy the book here. Want to send me a Dogecoin tip? You can send it here: DJk1nJZgyRePwDV5Qmn8AFtLyDXsUjyLxm
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