My Kindle is always filled to the brim with new e-books—many of which I read simultaneously. And while Dorothy L. Sayers’s wonderful and classic Lord Peter Wimsey mystery series is perfect for lazy beach reading, what has my attention at the moment is the much more mind-bending How to Bake Pi: An Edible Exploration of the Mathematics of Mathematics by Eugenia Cheng.
Wait! Don’t run! What’s fabulous about Cheng’s approach is how she uses cooking (and, more precisely, recipes) to explain some pretty complex mathematical theories, some of which I think I’m fully grasping for the first time. Of course, it’s no surprise that my mind immediately began to translate this idea to the world of investing, and I’ve already found the analogy of following a well-balanced “recipe” to be a great tool for introducing some important financial concepts.
Cathie, a brand new client, came to my office for our first meeting, and before I even had a chance to begin the conversation about her financial needs and goals, she blurted out a big barrier to success: “I don’t like the stock market.” She went on to tell me why. “My father taught me the value of real estate, and that’s the only way I want to invest.” Whoa. I had to put on the brakes and throw our whole discussion into reverse. And with the help of How to Bake Pi, I found myself talking about the importance of recipes. And cooking. What I shared was this:
Investing, quite technically, is “the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.” And yet investing is just a means to an end—to reaching your personal goals. Everyone’s goals are unique. They might include retiring early, opening a business, putting your children or grandchildren through college, or traveling the world. The options are endless. Whatever your goals may be, it’s important to follow the right recipe, blending all the available “ingredients” in a way that produces the desired outcome.
Think of it this way: flour by itself isn’t very appealing. The same is true for salt, a raw egg, vinegar, and baking soda. But when these ingredients combine with others, we can create a vast menu of outcomes—anything from pancakes to a buerre blanc sauce to a chocolate pudding. It just depends on the recipe or method we use to get there. Each ingredient presents an opportunity, and the more complex the menu, the longer the grocery list. To determine the best recipe to reach Cathie’s goals, we needed to consider every ingredient in our investing “pantry.” Stocks, bonds, mutual funds, real estate, and more. And it was most important to focus on the desired outcome—not the individual ingredients.
There’s chemistry involved in cooking and investing. Taking away stocks would be a lot like throwing out the flour and trying to bake a great loaf of bread. Can it be done? Yes. But it surely won’t create the same outcome as the recipe with flour. Of course, time plays an important role as well. If the loaf of bread doesn’t have enough time to bake, we end up with an inedible, gooey mess. But when we combine the right ingredients and bake them at the right temperature for the right amount of time, the result may even exceed our expectations.
By the end of our discussion, Cathie agreed to keep our pantry of ingredients full, and I had a clear understanding of her short- and long-term goals so I could determine the most appropriate recipe. I’ll certainly include real estate as part of the equation since she has a “taste” for that particular ingredient, but by agreeing to let me toss in the right amounts of stocks and bonds plus a dash of low-cost mutual funds, we’ve created a time-tested recipe that should deliver just what she’s looking for.