Stay For A While: The Wu Wei Way To Wealth And Prosperity

From Unsplash by Vidar Nordli-Mathisen

I have made efficiency and optimization of my lifelong study. Especially financial. Partly due to being a nerd and partly due to my early life of lack. Whether it’s the operation of my air conditioner or the flow my cash, I’m looking for ways to optimize and stretch. Even when it’s not necessary, I like how efficiency feels. I like getting more for less.

In the service of efficiency, I look for the rule or heuristic. What is the most stripped-down and concentrated way to describe a principle. And here is mine:

— Minimize Transactions

Transactions involve friction. Transactions involve risk. Guaranteed costs and potential expenses. Now that I’ve realized this truth I see how much wasted wealth and mental bandwidth that I’ve devoted to things that were unnecessary. I should have just cooled my jets.

In Chinese philosophy, the concept of Wu Wei says the same thing. Wu Wei is the practice of tactical and deliberate non-action. It isn’t non-action out of sloth or incompetence, but because it is the best path. If it is not essential to act, it is essential to not act. Wu Wei is explained in detail in the medium article by Harry J. Stead .

A great example of why this is in the purchase of an automobile. The transaction brings certain transaction costs and risks that I’ll illustrate below:

1. Taxes. 8% where I’ve lived
2. Tag a few hundred dollars
3. Title. Vary
4. Document prep fee. (if you are sucker they’ll add this on)
5. Retail vs. Wholesale. When you pay retail you’ll never be able to recoup that. Should you want out of the car you’ll only get trade-in or wholesale value. Private party value at best. In any event, you’ve received a 10 to 25% haircut between what you paid and what you could recoup.
6. Moving to the steepest end of the depreciation curve. A new vehicle might lose 25% of its value in a year. A 5-year-old vehicle might lose only 10% of its value in a year. A 10-year-old vehicle might lose just 5% of the value in a year. As time goes on the depreciation curve flattens. Best to be on the flattest part.
7. If financed, now additional insurances and deductibles over and above what you might have otherwise carried.
8. If financed, there is the cost of money. If one pays cash then it’s the opportunity cost of what that cash could have otherwise done.
9. Asymmetry of information. This is the big risk. When you buy a new vehicle this is less of a concern. With a used vehicle there is a universe of detailed information that the seller has on the vehicle. The buyer has only a thin slice of easily uncoverable surface information. Sure there is Carfax and queries of publicly available information. One can take it to their mechanic friend to kick the tires. But the intermittent stalling, the routine 2 a.m malfunction of the alarm system, the 2 months of operation with oil out of sight of the dipstick — these things the seller knows and buyer cannot learn. These are things the seller has no motivation to share and reasons not to share. The seller is always selling for a reason. Sometimes the seller sells due to boredom, divorce, or job loss. Often, the seller sells to off-load a problem. The buyer is always at an informational disadvantage and is taking a risk — no matter how thorough the due diligence. There are known knowns, known unknowns, and unknown unknowns. It’s impossible to eliminate these risks when buying a used vehicle. For a price, these risks can be partially offloaded to an extended warranty company, but again, this is another 5% to 15% cost added to the price.

When driving a vehicle of which we know the history, we pay no transaction costs to continue driving and we are in the very best position we can be in terms of costs and risks. If we know there is no major problem with our vehicle there is no lesser cost option to be had. If we know there is no problem with our car then getting another car trades a known or an unknown and pays for the privilege. To grow rich (or richer), keep driving your car for as long as you reasonably can.

Selling and buying a home involves around a 15% transaction cost when the selling and buying appraisals, surveys, inspections, insurances, commissions, taxes and fees are added on. Plus the non-trivial task of moving. And again, one is trading something they know completely for something they cannot know as well. It is taking a risk. Grow rich living in your house for as long as you reasonably can. Especially if there are no fatal flaws.

Fidelity once did a study that showed the majority of individual’s investment accounts underperform the market. Tellingly, the best performing accounts were those where the account holder had died or had forgotten that they owned the account. In other words, those who left their investments alone did better than those who didn’t. Again, this is an argument for minimizing transactions! Jack Bogle famously quipped “Don’t do something, just sit there!”. Warren Buffet once said that “the ideal holding time for a stock is forever”.

The mother of all transactions, and one that necessarily causes an avalanche of knock-on transactions is divorce. Houses are bought and sold, cars are bought and sold, titles are changed, costs are duplicated, movers must be paid, attorneys are enriched, and maybe after some plastic surgery and new gym memberships two more weddings need to be covered later on. Financially there is no collective upside for the married individuals to divorce. It is a financial catastrophe. I know I’m oversimplifying and it’s not always possible, but avoiding divorce is perhaps the number one way to avoid wealth destruction. Invest in your marriage and stick with it.

Unless one is a taxing authority, croupier, or bridge troll, the churn of unneeded transactions makes us poor. Be very choosy and deliberate in picking the car, house, spouse, job, city, or even shoes. Once the choice has been made, stay with it for as long as possible. Invest in it. Take care of it. Keep it going. Don’t trade up or sell out. Novelty is over-rated. Status signaling and keeping up with the Joneses is just voluntary poverty. Be still and stay for a while.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions