Part 233: Sample Bias and Investment Decisions

Hello and welcome back to Mortgage Advisor on FIRE.  This week I discuss luck and how it can change the course of you life.  Also, sample bias and investing; why people need to think critically when presented with data.

Quote of the Week

Never confuse wisdom with luck.

Ferengi Rules of Acquisition

I’ve had a few interactions this week that have all stemmed from a lack of understanding when it comes to statistics and critical thinking.  Life is so much easier when you stop to think about information you are being presented with, but unfortunately many people don’t take the time to just think for a moment about what they’re being told.

I was chatting with someone who works with defective products.  I’m not going to be too specific as I don’t want to point any fingers, but they were talking about how they would never buy this product as they’ve only ever seen people having issues with it.  I let them finish their mini rant and then asked them if they’ve thought about this from another angle.  

I explained that, in their job, they will only see people who have problems with the product because that’s exactly what their job is.  They would never have a customer come to them to state that the product works fine, because their job is to handle the products that aren’t working.  Their sample is not representative, and so their view on the product is skewed.  In research this is known as sampling bias, and it shares some overlap with survivorship bias.

Those who fall victim to survivorship bias will assume that a successful, or surviving, sub-group is representative of the whole population.  One of the most famous examples of this bias comes from the Second World War when it was noted that many Allied aircraft were returning from missions with bullet holes in the same general areas; the wings and fuselage, with the engines and cockpit less frequently damaged. 

As losses were mounting the Allies were scrambling to find a way to better protect their planes.  Using the data gathered from the bullet hole analysis, it was decided that extra armour should be concentrated on those areas showing the most direct hits from enemy fire, i.e., the wings and fuselage.

The Fundamental Error

The planes that were returning from missions were damaged in their wings and fuselage but still survived to return home.  Planes that were hit and damaged elsewhere were being destroyed, and that’s why they didn’t return home.  So, in this case the decision to reinforce the areas on surviving planes that showed the most damage was wrong.  They needed to think a little outside the box and reinforce the areas that showed little to no damage, because the data is suggesting that damage to those areas was lethal.

In cases like these the error is not taking the thought process on an extra step.  It’s not a complicated concept, but most of our thinking is done on autopilot.  Sometimes you need to look for what is missing rather than what is in front of you.

In life there are rarely times when there’s one clearly correct choice and one incorrect choice.  Often we can only guess at what the long-term consequences of our decision making will be.  The key is to make the best decision you can with the information you have, which includes factoring in the information you don’t have.  If your decision later produces negative results, you still can’t really say it was wrong if you did the best you could with the information your had at that time.  Ultimately, you can make all the right choices in the moment, and still end up in a losing situation.  Captain Jean-Luc Picard said it best;

“It is possible to commit no mistakes and still lose.  That is not a weakness; that is life.”

How does this relate to investing?

There is a whole genre of books about self-made entrepreneurs and investors who picked themselves up by their bootstraps, and claim that anyone can do it if they follow in their footsteps.  

Interlude

I’m fascinated by etymology and all things related, and I just wanted to share where the term “picking yourself up by your bootstraps” comes from.  It originates from the idea that you can lift yourself up from the ground by grabbing your bootstraps and, well, lifting.  Under gravity this is impossible, but also hilarious to watch people try.  

The phrase isn’t meant to be taken literally though, and is instead used to describe the act of pushing through and achieving through your own hard work, grit, and determination.  In more general terms, it refers to the act of building something up from within with no outside help.  This is also where the term “booting” or “rebooting” a computer comes from.  

Back in the early days of computers so much had to be done manually, but now you simply push a power button or flip open a lid, and the computer springs to life, because it’s been programmed to turn itself on and load the necessary software; the computer is picking itself up by its own digital bootstraps.

Back to investing…

These books are often inspiring, and I’ve read plenty of them.  However, I always pay attention to what is not said.  I understand that it’s human nature to share success stories.  We all get a kick out of telling the story of how we achieved this or that purely through our own hard work and intelligence.  Not many people will admit that their success is also, in no small part, due to chance.  This can be being in the right place at the right time, catching a client at the right time, getting a break because of a natural disaster, or winning the genetic lottery and looking the right way.  

There are so many random things that can direct the course of a person’s life.  Like being caught in a traffic jam, and missing your flight, which later crashes, or being stopped for directions and narrowly missing the out of control bus that smashes into a group of pedestrians, or finding £20 on the floor so you decide to treat yourself to a coffee where you bump into your future partner for life.  When you think about it, an absolutely insane amount of what we experience is down to chance, and that’s why I think many of these self-help, motivational books are dangerous and misleading.

Just because it worked for one person, it doesn’t mean it will work for every person.  I come back to sampling bias and survivor bias.  To be blunt, a book about a failed follower of FI who ends up sitting at a desk crunching numbers until 70 is not going to sell as much as a book about a young business person who networks and trades their way to millionaire status before the age of 30. 

People want success stories and they want to believe it could happen to them.  It might, but it probably won’t.  For every person that makes it and writes a book about it, there will be many more who fail.  It’s the same with new businesses.  The vast majority fail, but we mostly remember the success stories.

This is why I find books that advocate drastic changes annoying and irresponsible.  Always remember to ask yourself, when reading these types of stories, what the author is not telling you, and especially what they are not saying about the part luck played in their journey.

Weekly Update

It’s time for another round of Life Should Not Be This Difficult.

A couple of months back I was referred for a test by a consultant.  This was to be done on the NHS because they had the better equipment compared to the private hospitals in my area.  I was told I’d get a call or letter in the coming weeks.  A month ago I received a call whilst I was working, so the call went to voicemail.  I checked it a little later and I heard that it was the hospital calling to arrange an appointment.  They left a phone number and asked me to call back.  At the time, I didn’t have anything to record the number, and it was read out very quickly in the message, so I pressed the option to save the message, or so I thought.  I actually deleted it.  Yeah, that one is on me.

Anyway, I called the hospital’s general number and asked for the relevant department.  I was transferred through and left on hold for over 20 minutes before I gave up.  I asked Oana to call for me, and this is what happened…

Call 1: My call where I was on hold for ages.

Call 2: Oana calls and speaks with someone who explains there is no one available to take the call, and we’ll get a call back.  

We did not get a call back.

Over the next couple of weeks…

Calls 3,4,5, & 6: I call and go through to the right department only to be told there is no one around who can take the call, so I’ll get a call back.  This never happened.

Call 7: I call back and get through to someone and I start explaining my problem, only to be cut off midsentence; “let me stop you right there.”

If there was one phrase that was going to get my back up, it was this.  I let the person explain that there’s no one available and someone will call me back.  After they finished I let the silence hang for a beat and then ask, “would you mind letting me finish explaining what the issue is?”

After I’d finished explaining, I got a call back within a few minutes to get it all booked in.  It shouldn’t be this difficult.

A common issue for autistic people is that they can often be overlooked or pushed out of the medical system because of the sheer amount of bureaucratic incompetence.  I hate talking on the phone, but I suck it up and do it when necessary.  Without fail, it always leaves me drained and stressed out.  Some autistic people have it much worse, and it’s easy to see how some would give up in this situation.  It’s not good enough.  It’s pure incompetence and bad management.

More Cats…

Oana and I also got a little annoyed with the vet we took Poppy to.  For all the cats we’ve had, we’ve used the same vet and generally been happy with them.  Our last cat, Bobby a.k.a. Bibby, Bobbity, Bobbers, Buddybobs, had to have his teeth taken out.  This was done under general anaesthetic and not, as a friend implied, by the vet hitting the cat with an uppercut (they were not promoting animal cruelty, it was just another batshit conversation this friend and I have).  Bobbity was at the vets all day recovering and we paid just under £300.  This was in September 2021.  

So we had Poppy at the vet this week and they mentioned that they needed to possibly take a tooth out, and it would be done under general anaesthetic.  They said that stage one would be seeing how we get on with a powder to add to her food, and stage two (I had to suppress a giggle at this point; IYKYK) would be the operation.  We were given a quote for the surgery, and it came to £900.

In the space of less than three years the cost of this surgery, which is the removal of one tooth, and not several, has increased from just under £300 to £900.  That price better include dinner because I liked to be wined and dined before I get fucked.

We called a random vet and asked for an estimate for this type of surgery and was told roughly £500, maybe slightly more or less depending on the exact nature of the problem.  We also called our usual vet to query this and were fobbed off with some general statement regarding cost of living increases and what not.  I get that, but I can’t see how that can account for the price tripling in the space of less than three years.

Looking Back

If you missed the new Looking Back post from midweek, you can find it here.  In this post I discuss employee benefits including pensions and shares.

What am I doing?

TV: MasterChef (BBC).

Audiobook: All These Worlds – Bobiverse Book 3 by Dennis E. Taylor.

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Financial Update

Assets

Premium Bonds: £13,300.00. 

Stocks and Shares ISA: £69,411.64. 

Fuck It Fund: £1.10.

Pensions: £76,510.13. 

Residential Property Value: £229,818.00. 

BTL Property Value: £148,301.00.

Total Assets: £537,341.87.

Debts

Residential Mortgage: £172,638.93. 

BTL Mortgage: £104,885.22.

Total Debts: £277,524.15. 

Total Wealth: £259,817.72.

Investment Income in 2023: £1,192.76 (target £10,000).

A few things to point out this week.  We’ve now entered a new financial year so I’ve been able to start investing in my ISA again.  I withdrew almost all my Fuck It Fund and used most of it to top up the ISA, and a little to top up our contingency fund for the BTL.

One boost this week was that our index valuations increased on our two properties.  This means that our residential mortgage is now under 75% LTV which means we can look at interest only.  The plan would be to put the mortgage on IO and then start making payments off the parts of the mortgage which have the higher rates of interest.

BTL Update

We’ve had a few viewings this week but so far no offers.  Some of the feedback we’ve had has been fairly neutral; some good points and some not so desirable points.  So we’re just waiting for some more viewers and hopefully something will happen soon.

The Case Against BTL

I’ve had a couple of people approach me this week for advice on BTLs, and whether they should go for it.  This isn’t a question that has a definitive right and wrong for all people.  However, as a general guide I would suggest that it’s probably not a profitable venture for most people.  It seems like the only way to make money from BTLs now is if you have multiple properties.  This way if one property has a problem the others can pick up the slack, so to speak.  If you have one property and you have an issue with it, you could find that your one source of income has vanished and you still need to pay a mortgage, council tax, utilities, and so on.  

The thing about BTL is that you are starting from a negative position.  Once you add up the various costs of a typical deal, you are already behind on your investment.  Let me give you a basic example;

Purchase Price: £150,000

Deposit (assuming 25%): £37,500

Legal Fees: £1,500

Stamp Duty Land Tax: £4,500

On top of those costs, you potentially have fees for your letting agent drawing up the paperwork and completing the relevant safety checks.  There may be product fees with the mortgage lender.  You also have insurance to consider, as well as the potential funds to maintain the property whilst searching for a tenant, and a contingency fund to cover void periods, repairs and so on.  

Even if we just go with the three big expenses I mentioned, you have put down £43,500.  So you have a mortgage of £112,500, and an asset worth £150,000 but even if you sold it immediately, you would not break even due to legal fees and associated selling costs.  To make money, you need to rely on either capital gain, income from the property, or both.  

Our BTL was last rented for £725 per month, and from that we deducted our mortgage, insurance, agent fee, and an amount for tax and void/emergencies.  From that £725, we were lucky to draw down £250pm as pure income.  It would take six months of income to pay back the legal fees, and then a further 18 months to pay the SDLT bill.  As for the deposit, you are pretty much relying on capital gains.  The £37,500 could have been invested in stocks over two years which, after a further ten years growth at 6%, would almost double in value to £68,200ish.  

The thing about property is that if you are lucky (see the start of this post) you can snap up a property below market value, that is in great condition, find a fantastic tenant, and never have to pay for a repair.  Or, you could end up with a property where the electrics are fucked, and your first tenant leaves the property trashed and the ground floor ankle deep in water.  Yes, this happened to us.  You could have your second tenant trash the light fittings, curtains, break the cooker, and have one of the internal doors ripped off.  Yes, this happened to us as well.  

It’s actually amazing that we could still potentially turn a profit if we sell for a reasonable price, but the whole experience has not been worth the time, effort, stress, and money.

If you have the funds to go out and snap up three or four properties without needing any other funds, then I can see how it could work.  Having one BTL is just a pain in the ass.  If you’d asked me a few years ago about property I would have given a very different answer but experience has beaten the enthusiasm for property out of me.

That’s all for this week.  Thank you for reading.  Please remember to like, comment, share, and subscribe.  If you’re feeling generous, please leave a donation on the form below.

Disclaimer

The views and opinions in this blog are my own, and do not represent the views or opinions of my employer, nor should they be considered advice.

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