Rules of Thumb

Heuristics

Getting started in any type of investing can be incredibly overwhelming; but as with anything else, some basic knowledge can help ease that anxiety.  Think back to the start of your career, for me I was a nervous med student with pockets full of reference books.  But eventually my knowledge base grew, became second nature, and there was less need for help.

Similarly, inventing and financial planning operates with its own set of rules but this time, instead of referring to a clinical decision rule on MDCalc, I am building a list of time-tested “Rules of Thumb“.  These can help you make smart decisions in a short period of time.  The nerdy word for this is Heuristics which is essentially a mental shortcut to help with a process.  You give up some accuracy in exchange for time but this is the only way to process a large number of decisions efficiently.

If this topic interests you then you should take a look at Daniel Kahneman’s “Thinking, Fast and Slow” where he discusses ways people use mental shortcuts to make decisions “fast” but make it look like they did it “slowly”.

What Are They Good For?

With all “rules” there are inclusion criteria, exceptions, pitfalls, and pros and cons, but when used properly they help guide the decision-making process. Some are good for “Rule IN” to confirm that this is an investment to move forward with and some are good for “Rule OUT” to give you a quick answer when it’s not worth the hassle. The point of using a rule is to simplify and accelerate the decision-making process for an investment.  You don’t always have time to pull out a spreadsheet or calculator to figure out the Cap Rate, IRR or ROI.

Once something is Ruled IN by a decision rule then you can spend more time analyzing the numbers, looking for potential traps or figuring out if something is missing.  Sometimes you used the rules in sequence with a Rule OUT (1% Rule) followed by a Rule IN (50% Rule).

Enjoy!

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