2020 has become the butt of so many jokes. Everything that could go wrong did go wrong in 2020. The list of unfortunate events in 2020 is endless. This list of mayhem includes the loss of the beloved Alex Trebek. We invited him into our living rooms for 36 years, as he hosted the last 37 seasons of the popular game show, “Jeopardy!” This iconic figure seems irreplaceable.
Yet, as they say, the show must go on. In November, it was announced that Trebek’s interim replacement would be Ken Jennings. In 2004, Jennings set the record for most consecutive wins as a contestant, chalking up 74 wins with winnings north of $4.5 million.
Jennings’s run was quite impressive; he knows a lot of things about a lot of things. But still, Jennings doesn’t know everything, which is the topic of today’s discussion – the unknowable.
Everyone has “that” guy in their life. He’s a relative, he’s your friend’s little brother, or maybe he’s just a regular at your local bar. He’s the guy that thinks he knows everything. Whatever the conversation, he’s always offering random factoids to flaunt his knowledge.
Yet you know that he doesn’t know everything. Unlike him, you understand how much is actually unknowable.
Groundhogs & Financial Forecasters
What the stock market will do in 2021 is unknowable. Yet, this reality won’t stop every major investment firm from publishing their specific forecasts for 2021 investment returns. This ritual has become a tradition. Do we actually believe that the groundhog seeing his or her shadow offers any predictive power? No, but it’s a tradition. We, humans, despise uncertainty and will go to whatever length – foolish or superstitious – to predict our uncertain futures, be this weather or the stock market.
“The only function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith
Here’s a common opening line from a friend or family member, “I know you don’t have the crystal ball, but what do you think the market will do next year?” Translation: “I realize that you have no idea, but it would be comforting if you made a prediction anyway.”
I’m a financial advisor – not a mystic, not a soothsayer – so how do I, as a professional, reconcile the unknowable. I accept that predicting short term market movements and developing complex forecasts regarding future events is not in my wheelhouse. Being the smartest guy in the room is not my edge.
So, if I’m not the smartest investor, where do I find my edge?
Before I answer that question, let’s first discuss basketball; it’s my favorite sport. Before the pandemic, I was typically playing basketball with a group of guys 2 or 3 days a week. A common basketball adage is that you can’t teach tall. This is often said in jest, but the sport really is a tall man’s game. The average height of an NBA player is 6’6″, the average American male is 5’9″, and me, I’m 5’7″.
In basketball, height is not my edge. But I’m fast and have a quick first step. I’m often the fastest guy on the court, and fast matters in basketball. So, most of my game and my strategy is to play to this strength.
Investing is no different. You need to play to your strengths, and you need to find your edge. As I said, intellect isn’t my edge, and that’s probably the case for most of us – there is a rocket scientist or a Ken Jennings out there that just knows a lot more than you and I.
When it comes to investing, my edge is my time horizon and my temperament.
Lately, I often find myself telling clients that the best time horizon is forever.
Time horizon is a term we use in finance to describe an end date when one plans to spend the money they’ve saved. Because investments tend to fluctuate in value, it’s important to define when an allocation of money is earmarked to be spent. This way, you can find an investment that is suitable for that time horizon – the objective is simple, assure that the money is worth the same or more when that end date arrives.
My edge as an investor is that my time horizon is forever. This isn’t true for some investors. Perhaps they have a large future purchase (e.g., house) that they are earmarking funds for, or maybe a significant portion will be resourced for income in retirement. These shorter than forever time horizons force these investors to adjust their strategies to meet these stated requirements. Sure, I have some other goals that don’t fall into the “forever” realm, but most of my wealth is set aside in this forever bucket.
The key to building significant long term wealth is found in the power of compounding – allowing your interest to earn interest on its interest and so forth. Often seen as an evergrowing snowball rolling down the mountain. And the key ingredient to compounding? Time. So, what’s forever? Lot’s of time.
“The first rule of compounding: Never interrupt it unnecessarily.” Charlie Munger
The Most Important Quality…
One of THE most difficult realities about investing is how intertwined our emotions and our money are. When it comes to our money, we are all momma bears – we are protective and ready to roar and growl if we believe anything is threatening our dollar cubs.
If you invest long enough, though, you realize that every perceived threat that comes your way is eventually forgotten and often has less impact than expected. In our investing infancy, we see all threats having the potential to cause permanent damage, but we realize how much is actually transitory as we mature.
It isn’t your IQ that builds up this stamina; it’s your experience. Once you’ve made it through the other side enough times, you begin to build up hope to fuel you through the next obstacle. I can’t say this is true for all of us, though; some never learn.
The dictionary definition of sanguine is “optimistic or positive, especially in an apparently bad or difficult situation.” This is the type of temperament an investor needs, and this is an edge in a world where most investors allow their emotions to get the best of them in times of distress.
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett
“Read” All About It
I recently read The Psychology of Money: Timeless lessons on wealth, greed, and happiness by Morgan Housel, and I’ve found myself recommending it to a lot of friends lately. In one of the chapters, Housel references one of his favorite Wikipedia entries, that of Mr. Ronald Read. The Wikipedia entry opens up, “Ronald James Read(October 23, 1921 – June 2, 2014) was an American philanthropist, investor, janitor, and gas station attendant.” Not a list of titles you often see in sequence – philanthropist, investor, janitor, and gas station attendant.
The Wikipedia page goes on to describe how Mr. Read accumulated and bequeathed his wealth:
Read died in 2014. He received media coverage in numerous newspapers and magazines after bequeathing US$1.2 million to Brooks Memorial Library and $4.8 million to Brattleboro Memorial Hospital. Read amassed a nearly $8 million fortune by investing in dividend-producing stocks, avoiding the stocks of companies he did not understand such as technology companies, living very frugally, and being a buy and hold investor in a diversified portfolio of stocks with a heavy concentration in blue-chip companies.
To me, this is just a beautiful reminder that it isn’t my intellect that will fuel my investing success, but rather my forever time horizon and my sanguine attitude that will carry me across the finish line.
And That’s a Wrap
That’s it. That’s all I have for you this week. Be sure to listen to the Thoughts On Money podcast to catch more of our insights on today’s topic. And of course, I will be back next week with more of my Thoughts On Money.