Bookworm: 3 simple steps to tackle life’s big decisions
Don’t be fooled by how easy it is to use Seymour Schulich’s “Decision Maker”. It can help you a lot.
Welcome to Bookworm, my column that seeks profound insights from investing and business books. Today’s insight comes from a book that flies under the radar yet offers a useful guide to life from somebody that, by most standards, has lived a rather full one.
Today’s insight
Get Smarter is written by the Canadian billionaire Seymour Schulich. Among several other notable achievements, Schulich co-founded Franco-Nevada, the wildly successful mineral royalty company that I own shares in and view as a ‘forever’ holding.
I read Schulich’s book before I had even heard of Franco-Nevada, and I still have a copy of it squirreled away somewhere at my in-laws’ house back in Scotland. I would recommend getting your hands on one if you can. The method we’re going to look at now is worth the price of admission alone.
While most editions of Bookworm focus on methods that can be used to analyse an individual stock or investment, today’s nugget can be applied far more generally in your life.
Schulich’s Decision Maker
Most of life’s big decisions involve trade-offs. Moving to a new area might give you a bigger house and more space. But it could also mean leaving people and things that you love behind. Taking a new job might bring a bigger paycheck, but it could also bring changes your lifestyle that you aren’t so keen on.
Without a blueprint for making big decisions like this, it is easy to suffer from analysis paralysis. Even worse, making a poorly informed decision can lead to regrets in later life.
This is why I think the simple decision-making tool offered by Schulich in Get Smarter is so powerful.
Three steps to better decisions
Schulich’s Decision Maker is essentially a pros and cons list on steroids:
- Write down the positive outcomes from taking the action you propose. Then give each point a score out of ten for how important it is to you, ten being the most important.
- Write down the potential negatives of taking the proposed action. Then give each point a score out of ten, with ten representing the biggest downside you could imagine.
- Add up the scores from each column. If the positives outweigh the negatives by a factor of at least two, you should say ‘yes’ to whatever you are considering.
This framework has the potential to add structure to some of the most important financial decisions you will come across in your life. Decisions such as:
- Should I target home ownership or just keep renting?
- Should I move from my existing home to another one?
- Should I move my retirement savings from an industry or retail fund into an SMSF?
- Should I salary sacrifice into my super or invest outside of it?
- Should I attempt to start a business or stay in my current job?
- Should I take a pay cut to work in a more meaningful job?
An example from my life
Taking my role at Morningstar last year, for example, wasn’t just a change of job. It was a major change of lifestyle. From working remotely as a freelancer to working as a full-time, often office-based, employee.
Here is how the decision might have looked using Schulich’s matrix:
| Positives (importance out of 10 | Negatives (importance out of 10) |
|---|---|
| Chance to stay in Australia longer-term (10) | Much less annual leave than when working freelance (10) |
| Chance to work for a company that I have admired since I started investing (10) | Less flexibility on working hours and location (7) |
| Higher and more regular basis salary than freelance work (7) | Leaving old clients that I had known and worked with for years (6) |
| ‘Normal’ working hours for southern hemisphere versus working with UK clients (8) | Short-term ceiling on income/earnings versus freelancing (4) |
| Easier to get an apartment on full-time contract, can stop moving between short-term options (8) | |
| No need to do any of the admin attached to freelancing (6) | |
| More social opportunities than working alone (5) | |
| More exposure and opportunities for progression than ghost writing (7) | |
| Total: 61 points | Total: 27 points |
The decision to join Morningstar always felt like a “no-brainer” to me. But this framework makes it even clearer: the positives of accepting the role and change of lifestyle overpowered the potential drawbacks.
Guarding against biased or skewed decisions
Schulich touts this method because he says it stops one thing on either side of the equation from completely dominating your decision.
Consider, for example, using this method to think about whether you should buy a house or keep renting.
Without using a method like this, one emotional and highly compelling item in the ‘for’ column – like the peace of mind from owning and not renting – might push you so far towards home ownership that you don’t consider other aspects of the equation.
Using this method makes you look at factors on both sides and take a bit longer to think about how important each positive or negative is to you.
The required 2-for-1 multiple could also be seen as a “margin-of-safety” against positives and negatives that you forget or misjudge.
Another positive of this method
The benefits of using this method don’t stop once you have made the decision.
Keeping a record of your thinking and going back to review it later can help you avoid irrational feelings of regret later. For clarity, I don’t regret my decision to change job at all. But I think it’s impossible to make any of the really big decisions in life without the potential for nostalgia to creep in.
My previous life/work balance, for example, bordered on the ridiculous. The flexibility of working remotely also allowed me and my partner to look after peoples’ houses and pets while they were away, meaning that our outgoings on rent each month were near to zero.
My decision to change job has resulted in me having around three times fewer days off each year, while the shift to renting from housesitting means I am not even that much better off financially.
Would it be easy to feel nostalgic about all of the spare time I used to have? Of course it would! But here’s the thing: feelings of nostalgia magically ignore 1) the positive outcomes of your decision, some of which you may have started to take for granted 2) the downsides of your previous life and 3) your rock-solid rationale for making the decision you did.
Going back and reading the ‘Decision Maker’ you wrote out at the time of your decision can help you take off the rose-tinted spectacles. Give yourself a break.
What has this got to do with investing?
Adding structure to your decisions, building longer lasting conviction in those decisions, and guarding against self-doubt all have everything to do with investing.
In fact, I would say they are essential for being able to see out an investment plan over the long term. Especially if you are managing your own investments and getting constant feedback from the market on how well you are doing.
Revisiting Schulich’s matrix also made me realise the power of writing down your thoughts and feelings for later reference. Many investors, for example, keep a journal detailing all of their buy, sell and hold decisions. Is it time I made a serious effort to do this, too?
A fun fact to finish
James Gruber, the editor of Firstlinks and my colleague at Morningstar, used Schulich’s Decision Maker framework when he was weighing up the purchase of his motel. You can read about the investing lessons he has learned from running that business here.
