Investing is like exploring an unknown territory. What are the tools to help us navigate.
In this episode you’ll learn:
- What does it mean to be wayfinding.
- What are wayfinding tools to assist with investing.
- A history of New York taxi economics.
- How predictive are valuations for stock returns.
- How have recessions influenced the outcome of U.S. presidential elections.
Show Notes
I mentioned a taxi cab ride from LaGuardia to Park Slope would have been $80. The actual estimated cost is $40.20. See fair estimator.
Lewis and Clark Expedition Supplies
Undaunted Courage – Stephen E. Ambrose
Taxi medallion owners find their dreams dashed by Uber, Lyft – New York Post
Forecasting stock returns: What signals matter, and what do they say now? – Vanguard
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Summary Article
Investing Is Wayfinding
For many years when flying into New York LaGuardia airport I took a yellow taxi cab ride into the city to arrive at my hotel. Unlike JFK and Newark airports, there isn’t a convenient train connection to Manhattan from LaGuardia.
I’ve always enjoyed the relatively short cab ride despite at times feeling a little car sick due to the constant starting and stopping by cabbies driving in traffic with two feet on the car pedals.
Driving In Circles
This past week I arrived at LaGuardia but didn’t take a cab. Our designation was an apartment we rented via Airbnb in the Park Slope area of Brooklyn about 14 miles south of the airport. A cab ride would have cost approximately $40.20 before tipping.
Instead, I used the Uber app on my iPhone and joined a car pool for the trip south. Uber identified the driver, the type of car and its license plate that would pick us up. The price was $24.23 and included dropping off our car pool passenger Harriett at a different location in Brooklyn.
The ride was slow due to traffic but going well until we were about three miles from our apartment. The way Uber works is the drivers have an app on their phones which tells them who they are going to pick up and provides directions for getting there.
When we know exactly where we are going, having step-by-step directions to our destination can be extremely helpful. The only requirement is to follow the steps.
Unfortunately, our Uber driver was not good at following directions. He would get frustrated when stuck in traffic and not wait for the designated turn. He would turn early and not necessarily toward our destination. At that point, the app would reroute him to the new, quickest way to the apartment.
There were several problems with our driver’s methods. First, he actually had no idea where he was. He was entirely dependent on the app to tell him where to go next.
Second, the app wouldn’t let him zoom out so he couldn’t get a broader perspective of where we were. When he made an early turn he had no idea if he was turning toward or away from the apartment.
Third, the driver spoke very little English so whenever we tried to help out he became even more frustrated.
This going in circles went on for about twenty-five minutes until we found ourselves in traffic on Interstate 278 in Brooklyn Heights where it was no longer easy to get off the highway and make a wrong turn. We just went with the traffic flow.
At that point, the driver settled down, stopped trying to second guess the app and we made it to our apartment.
When we know where we are going, the trip will go more smoothly if we follow the directions, look up or zoom out to get a broader perspective in order understand the lay of the land, and have the communication skills to ask for help if we make a wrong turn or get lost.
Those tools and practices can be helpful even if we don’t know the exact destination. When we only have a vague sense of where we are going, we are wayfinding.
Lewis and Clark Were Wayfinders
The American explorers Lewis and Clark were wayfinders. They didn’t have a map as they explored the western United States looking for the easiest route to the Pacific.
They had compasses and a general sense of direction. They also had a telescope, microscope, chronometer to calculate longitude, and the book “A Practical Introduction to Spherics and Nautical Astronomy.”
Lewis and Clark spent $2,324 on equipment for their expedition including boats, oars, camping supplies, clothing, medicine, armaments and presents for Indians, including 4,600 sewing needles, 130 rolls of tobacco, 288 knives, 288 brass thimbles, 144 smalls scissors and 25 pounds of colored beads.
When you are wayfinding, you need to be prepared for the unexpected.
Investors are wayfinders. They only have a general sense of what might happen. There are no guarantees we will reach our destination.
We get in trouble as investors when we forget we are wayfinders and believe outcomes are certain. That if we just follow the correct formula, we will reach the wealth level we desire.
Investing In New York Taxi Medallions
In 1937, there were 30,000 cab drivers in New York City ruthlessly competing for fares in a metropolis with a population of approximately 7 million.
That year Mayor Fiorello La Guardia signed the Haas Act that introduced a medallion system to limit the number of taxis.
13,566 medallions were sold for $10 each. Today there are 13,587 taxi medallions serving New York City’s population of over 8 million and 50 million annual tourists.
When supply is limited and demand grows, prices increase. In 2014, taxi medallions were worth $1.3 million, a 16.5% annualized return from 1937, one of the most steady, best performing investments in the United States.
Limited supply and rising prices also invite competition. Today there are 90,000 for-hire vehicles apart from taxis, many of which are drivers for Uber and Lyft, driving their own vehicles.
With the increased competition, taxi medallion prices have plummeted by 70% since 2014, bringing financial turmoil to taxi drivers who borrowed money to buy medallions.
According to an article in the New York Post, in 1991 taxi driver Nino Hervias scraped together a down payment to purchase a yellow cab medallion for $118,000.
“It was a good investment, on a yearly basis averaging about 10 percent of the value; we were counting on that,” said Hervias. “I told my kids I would give them each $200,000 for college.”
He used the value of the medallion to back a $600,000 mortgage on his New Jersey home.
But with plummeting medallion prices, Hervias said through tears, “We are waking up in the middle of the night not knowing what our future is going to be. This is my retirement. This is all I got. I have nothing.”
Investing in a taxi medallion seemed like a predictable, safe investment with a known destination. Instead the outcome was as uncertain as any other investment.
Tools for Investing Wayfinders
Prudent investors recognize they are wayfinders and like Lewis and Clark rely on tools and methods to guide their journey.
They diversify their holdings, save more and spend less of their income and have emergency savings. They also get a broader perspective to know where we are in the economic and market cycles so they are not investing blindly and can make portfolio adjustments if necessary.
Related Episodes
20: How To Allocate Your Assets
201: Is Your Portfolio Unbalanced?
217: Rebalancing, Overvaluation, Market Timing and Stock Splits
229: Stop Maximizing Your Returns Using Modern Portfolio Theory
