The Ghost of the Past

December 25, 2022

by Stephen Stofka

Merry Christmas and Happy Holidays! This last letter of the year will be about choices and wishes, about means and ends. Aristotle distinguished between choice as a means and a wish as an end. A wish can be an illusion of choice, but it is not a choice. A choice is a path toward a wish. A wish is the reason for making a choice. Understanding the role of choice and wish in our lives can help us become more prudent investors.

A principle of economics is that choice involves an opportunity cost, the giving up of one thing for another. A child who wishes to be a basketball star soon learns that this requires many hours of layups and passing drills, shooting foul shots and other exercises that are the means to achieve that wish. The time spent doing those activities cannot be spent on some other activity and is an opportunity cost. An opportunity cost is a sunk cost that should not factor into our next decision but people have a natural aversion to loss. Investors are cautioned not to “marry” their investments, meaning that we shouldn’t stick with an investment simply because we don’t like taking a loss.

A post hoc analysis of a series of events may yield little useful information that will guide us in future choices because the pattern of events and choices will likely not be repeated. A seasoned executive of a bankrupt company may make a post-mortem comment, “We expanded too fast for our target market.” When we spend time analyzing a chain of decisions within a unique set of circumstances we do not spend time doing something else. We are lured by the illusion that the ghosts of past events can communicate with the ghosts from our future, that we can learn from the past. Most of the time, we can’t.

“I should have sold this spring when it was near 50 and rates were low,” a guy in front of me in the checkout line remarked to his friend, then they stepped forward to one of the self-checkout machines. I guessed they were talking about Bitcoin and mortgage rates. We judge the quality or accuracy of our choices by the information or insight we gain later. We can drive ourselves crazy with this type of time travel.

During the past two decades, the median sales price of a home has increased 4.7% per year. Disposable (after tax) personal income has risen only 4.1% per year. House prices in relation to disposable income is near the height of the 2000s housing bubble, as shown in the chart below.

A 20% down payment on a conventional house mortgage is a wish that takes a long reach. Choices include an FHA loan with a smaller down payment, cutting back on expenses or working an extra job for additional income. To some, Bitcoin was another choice, an asset whose value would increase faster than the average 10% annual gain in stocks or the paltry interest paid by savings accounts during the past decade. A $10,000 purchase of Bitcoin might grow to the size of a conventional down payment in just a few years. Even though Bitcoin’s price has fallen dramatically from the heady levels of $65,000 in November 2021, the price is still double its $8,000 price in January 2020. That is an annualized gain of almost 20%, double the 9.45% average annual gain of the SP500 total return (2022).

Each year is an unfolding narrative with no dress rehearsals. To alleviate the uncertainty, we look to the past and extrapolate into a future guaranteed to be unlike the past in significant ways. We wish we could predict the future, but our choices help construct our future. We can only look in front of us.


Photo by Kalen Emsley on Unsplash

S&P 500 Total Return Index, [SP500TR], retrieved from, December 23, 2022.

U.S. Census Bureau and U.S. Department of Housing and Urban Development, Median Sales Price of Houses Sold for the United States [MSPUS], retrieved from FRED, Federal Reserve Bank of St. Louis;, December 24, 2022.

U.S. Bureau of Economic Analysis, Disposable household income [W388RC1A027NBEA], retrieved from FRED, Federal Reserve Bank of St. Louis;, December 24, 2022.

U.S. Census Bureau, Household Estimates [TTLHHM156N], retrieved from FRED, Federal Reserve Bank of St. Louis;, December 24, 2022.

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