The Mathew Principle

In the book of Mathew in the bible is a parable called the parable of the talents (Mat 25:14-30).  The parable simply stated:  To him who has more will be given, and to he who has not all will be lost.  

The principle is actually a study in risk management.  In blackjack the house is slated to win.  The reason is the player goes first.  If the house and the player go bust, the player loses because he busted first.  This gives the house an 8% advantage.  To he who has more will be given.  The player through judicious betting and application of the rules can reduce the 8% disadvantage to a 0.2% disadvantage, and by understand the history of what has gone before (a deck has only 52 cards so each subsequent hand has a different sequence of return and the smaller deck may be more favorable to the player than the house) a player can shift those .2% odds and be a winner.  Shifting the odds is risk management.  It is complex because one wrong move exacerbates risk as opposed to reducing risk.  Also the SOR needs to work in the players direction.  By never paying for your return with too much risk, you can move from loser odds to being a winner.

Bogelhead is not “the best” portfolio.  If you bought AMZN in 1997, you would be up 24000% compared to 140% for S&P.  Bogelhead is however adequate and it’s systematic, and in that systematization Bogelhead automatically manages risk.  If you own a Bogelhead 2 fund it lives on the efficient frontier and you pay for your return with the proper amount of risk.  If you own a Bogelhead 3 fund it does not live on the efficient frontier and you pay for your return with an excess of risk.   Bogelhead 2 is like the guy with 5 talents.  He risks perfectly, doubles his money and gains stature and gets the last guys talent.  Guy #1 is like a Bogelhead 2 portfolio started at birth.  His starting sum (5) could be provided by starting early with discipline and best risk management.    The guy #2 with 2 talents risks, but not correctly, he doubles his money but gets no extra because he only doubled to 4 not 10.  He is like a Bogelhead 3, risk taken but not optimized.  #2 could have benefited from adding a little AMZN to his mix.   #3 failed to risk.  He did not invest and was penalized.  

We glibly talk about how easy it is to invest and kind of look down our noses at those who don’t.  The presumption is those who don’t are just slovenly or clueless.  About 70 million of the population has an IQ under 85 or has something like schizophrenia.  These tend to compose the “homeless” and are never going to invest.   If you make 36,666 per year take home and have perfect discipline and 40 years of steady W2 can max out a Roth ($36666 * .15= $5500) and if nothing goes wrong, no job loss, no bad SORR, no hurricane Michael, no cancer diagnosis, you can pull 36,666 out of your portfolio for 30 years.  This guy is like the guy with 5 talents.  If you save only 30 years or use a poor risk strategy portfolio, you will have barely half (2 talents).  If you don’t save (1 talent) someone else will be called upon to feed you.  Probably only 40-45% of the people have the possibility do 40 years of Roth maxing out since the median single wage is 44K pretax.  You would have to be amazing on discipline and luck to get this to work.  So only 50% or so of the people have the where with all to engage apart from some employee participation.

4 Replies to “The Mathew Principle”

  1. I think we were the Guy #3 since we didn’t even invest appropriately for the past decade. Even when fully invested I will be Guy 2 since being Canadian I am forced to have a 3 fund portfolio.

    I am trying my best to impart upon my children the need to start investing early and to keep at it. My main focus is risk.

    1. You were guy #3 then worked and invested another 20 years and you’re much closer to guy #1. Having you in my life is a treat, a living example of the Mathew principle

  2. Continue to absorb your comments about Boglehead 3 fund being off the efficient frontier. For an unsophisticated investor, a DIY Boglehead 2 or 3 fund seems adequate, but your point is well-taken about increased uncompensated risk in the 3 fund.

    I find this particularly resonant because opting in or out of an international stock allocation seems to be more religious preference rather than a data-driven hard fact. (As in medicine, wide diversity of opinion reflects a lack of consensus on what the data say).

    I’ve advocated a Boglehead 3 fund for newbie investors in the past when they asked me, but I’m starting to rethink: if a 2 fund is adequate to task and on the frontier, maybe that’s enough.



    1. This is America, you get to do what you want. If you want to pay 5 bux for a pack of gum when you can buy the same pack for a buck, this is America! Either fund will likely make money during accumulation since the risk management in either is basically automatic so it’s a matter of efficiency and style. Buffet thinks the 2 fund is the tits. Bogel thought that till the boggleheads beat him into submission. A nod is as good as a wink to a dead horse.

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