Having Faith in The Future
Your outlook and returns are highly correlated
Faith in The Future
One of the most important principles in behavioral investment counselling is faith in the future. This is the belief, based entirely on historical events, that optimism is the only realism. Optimism is the only conclusion supported by facts. The commoditization of miracles—the almost instant progress of anything from breakthrough to commonplace—belies the fact that progress is not linear, but exponential, and that in fact the curve of the exponent is bending upward.
An old minivan contains far more computing power than was available to NASA in 1970, on the night Apollo 13 blew up. Since that night, computing power has gotten millions of times smaller, millions of times cheaper, and thousands of times more powerful. This is a multi-billion-fold increase in computing power per dollar. In the next half century, we’ll see another such multi-billion-fold leap. When it’s done, information technology will have solved all our problems, including (but not limited to) energy, poverty, disease and the environment.
Long-term pessimism, on the other hand, is not merely wrong, but counterintuitive: no one is studying history and arriving on a fundamentally declinist world view. While there may be year-to-year perturbations, the overall trajectory is clearly skyward.
As such, faith in the future comes with a famous saying that I often like to repeat: “I don’t know exactly how things will turn out all right; I just know that they will turn out all right.”
Patience
We are living in an age of enduring investment truisms but of late-breaking market news, and this places investors under constant pressure. Pressure to do something. Pressure to react to the events of the moment, rather than acting on the goals of his lifetime and beyond.
The more an investor gives in to the fads or fears of the moment, the more he chases what’s “hot”, and eschews what’s not, as he loses sight of his long-term financial goals. The more mistakes he makes, the more his long-term return declines.
So, You’re a Trader, Are You?
Brad Barber and Terrance Odean, University of California scholars demonstrated many years ago in a paper titled “Trading is Hazardous To Your Wealth” that the more often investors changed their portfolios, the lower their returns were. They also discovered that the things people sold did better than the things they bought with the proceeds.
Richard Thaler and his colleague Shlomo Benartzi found that the more often people even looked at their portfolios, the lower their returns. Apparently, because, the more often you price your portfolio, the more likely you are inopportunely to ditch something that appears to be lagging and to go chasing something that’s currently shooting the lights out.
(This makes sense, insofar as price and value are always and everywhere inversely related, selling the high-value/low-priced laggard to buy the low-value/high-priced “winner” must surely be a formula for substandard returns. That’s the ultimate irony inherent in performance-chasing).
“Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” by Brad M. Barber and Terrance Odean, THE JOURNAL OF FINANCE, VOL. 55, NO. 2, April 2000 faculty.haas.berkeley.edu/odean/papers%20current%20versions/individual_investor_performance_final.pdf
“Heuristics and Biases in Retirement Savings Behavior” by Shlomo Benartzi and Richard Thaler, JOURNAL OF ECONOMIC PERSPECTIVES, VOL. 21, NO. 3, SUMMER 2007 aeaweb.org/articles?id=10.1257/jep.21.3.81
—Avery