Category: Blog

Time is an interesting dimension. It is a fixed measurement, yet our perception of time varies greatly depending on what we are doing.

It has been said that the longest eight seconds in life is riding a bull. I never rode a bull and have no interest in testing that statement for myself. So, I will take it as fact. But even so, eight seconds is eight seconds – regardless of what we are doing.

It’s About Perception

Time seems to “fly” when we are engaged in a fun, exciting or stimulating activity. And it appears to stand still when we are scared, anxious or bored. In other words, the things we enjoy in life make it “go” quickly, while the things we dislike seem like they last for an eternity.

This means that when we are engaged in desirable activities, such as summer vacation with the family, it may be worthwhile to take a moment to slow down and reflect on the experience. This will allow us to relish the moments and the subsequent memories – which we can call upon during the more difficult times.

Slowing Down & Investing

Slowing down can also help us make better financial decisions. When information comes at us in an orderly rate, we can process the information just fine and draw logical conclusions. But when we get a ton of information all at once, our brain freezes – just like a computer when trying to process many things at once.

When the brain freezes, it can no longer process information and think critically. That part of the brain is offline. If we require a decision right away, the brain will transfer the decision-making to our impulsive brain. That means our decisions will be more influenced by intuition and how we feel rather than thoughtfulness.

One of the things I love most about being an advisor is helping investors decipher what information is worth considering and what isn’t. I’ve found that makes decision making easier, and can greatly improve the overall investment experience.

– Scott

As we are midway through the year, it can be a good idea to take stock of what happened so far, and what we can learn about it. Looking back is an important activity as we seek to progress. It’s not about beating ourselves up for mistakes or feeding our ego for profitable decisions; it’s about learning and improving our thought and decision-making process.

The Fads of 2021

There are two dominant fads this year: “investments” in what are known as meme stocks and cryptocurrencies. Significant movements in both types of assets were driven by headlines and social media posts, not by fundamental changes in the businesses.

Hype is the primary force behind the making of a fad. This is one way to discern the wisdom of an investment. Positive hype often drives prices significantly higher and fuels overconfidence for “investors”. The lack of positive hype can deflate an asset and cause “investors” to dig in even deeper with their speculative convictions. Hype initiates a fad; our emotions keep the fad going.

Buyer Beware

“Investing” in a fad is not real investing, it is speculating. This is because price movement is driven more by what someone says or how a group of people feel than the underlying value or business the asset represents. Such stimuli are highly sensitive and may change radically on a daily basis without any foundation.

Fads can make or lose you a lot of money. A fad can be a fun and exciting way to “invest”. But beware, such excitement may be short lived. And the cost of the powerful, yet temporary, excitement may be significant.

Looking Forward

Expect to see more fads. There will be things that appear to work better than your strategy. There will be talks of “this time is different” and “paradigm shifts” to rationalize opinions and investment decisions.

The ultimate question is whether you want your portfolio to be exciting and hip, or whether you want it to be enduring. I suggest the latter.

– Scott

Portfolio returns and achieving financial goals are a largely a function of two inputs: investor skill and luck. Oftentimes, those inputs get confusing – identifying what is skillful and what is luck/chance.

A basic rule of thumb is that anything you cannot personally control is luck. Investors dedicate a significant amount of time, attention and energy to things beyond their control; in other words, we often confuse luck for skill. We should be focusing more on those things we can control – those things that are actually skillful.

Investment skill is often demonstrated through patience and discipline. These are not easy qualities to develop. The three tips below may make it a bit easier to improve your investment skill.

1. Increase Conviction in Your Strategy

   Many investors make security selections based on a “gut feeling”, expected quick gains or perhaps something they heard or read. If we don’t know why we own something, we are much more likely to be influenced by short-term news, market movements and our emotions. Having conviction in your strategy can provide the strength and courage to remain disciplined during difficult times

2. Know Your Emotional Limits

   Everyone is different. Some people are more susceptible to uncertainty and loss than others. Don’t pretend to be someone you are not; a lot of money is lost because we act like the person we wish we were rather than the person we are. Once you identify your limits, we can tailor an action plan to give you the best probability of achieving your financial goals in the desired time frame

3. Create a “What If” Plan

   The markets never go straight up. Significant pullbacks, recessions and even crashes are inherent features of capital markets. It’s not a question of if, it’s a question of when they will happen. During those times our emotions run high and making a thoughtful decision is very difficult. For that reason, it is helpful to create a “precommitment plan”. A decision plan of what you will do if X happens. That way when things are difficult, it’s not about deciding what to do, it is simply acting on what you have already decided to do

Taking the emotion out of decision making helps us think more clearly and deliberately about our choices and their tradeoffs. Increasing your investment skill isn’t about brute strength. It is about thinking realistically about who we are, what we are going to face and having a plan to get us through the tough times.

– Scott

©2021 The Behavioral Finance Network. Used with permission.

These days it seems there is so much to worry about. The media is replete with news of shootings, civil unrest and the global pandemic. Financially, there are concerns about inflation, taxes and deficits.

Life, with all its trials and uncertainty, provides ample opportunities to worry. If we aren’t careful, we could be consumed with worry – crowding out the ability for us to experience happiness.

Be Happy

Telling someone “don’t worry” is not realistic. There are things we should worry about. A healthy amount of worry can influence us to plan better and take action to obtain better results. But there must be a balance. Worry and happiness are mutually exclusive. There is definitely a time to worry, but we need to make sure we make time and opportunity for happiness.

Power of Laughter

Young children are often the greatest examples of happiness; we can learn a lot from them. They are quick to forgive and they laugh – a lot. Studies show that the average four-year-old laughs 300 times per day. Any guess how many times the average forty-year-old laughs in a day? Only four times¹.

Laughter causes our brains to release dopamine, oxytocin and endorphins. These hormones not only make us feel good, but they create emotional bonds with others. In a world of worry and disunity, it sounds like this is a fantastic remedy. Good-natured and appropriate humor is uplifting and unifying.

Not Funny? Don’t Worry

You don’t have to be “funny” in order to benefit from laughter and levity. You can surround yourself and enjoy those that have a good sense of humor.

Even something as simple as smiling at someone or complimenting another can release neurotransmitters that elicit positive, unifying feelings. This may not be easy to do in a world filled with worry. But it will certainly be worth it – both for you and the recipient of your goodness.

– Scott

1. Aaker, Jennifer & Bagdonas, Naomil. Humor, Seriously. Page 25. Random House, 2021

We are three months into 2021 and there is a good chance that half of all the New Year’s resolutions have already failed. A long-term study by the University of Scranton found that less than 10% of resolutions become part of our lives¹.

Such a high failure rate may be due to making bold resolutions we aren’t quite ready for. In other words, the resolution may be aspirational, but not realistic. Another reason may be because there is no plan to get from A to Z by way of systematic progression. We sprint right from the gate and burn ourselves out.

The key to real progress, be it personal or professional, is baby steps. Rather than big resolutions, it is better to focus on a few simple habits. You have habits of commission (I am going to do ABC) and habits of omission (I’m not going to eat XYZ). No matter the kind of habit, successfully forming and retaining them follow the same method.

Creating Habits That Stick

You begin with a resolution and identify the reason or purpose behind the resolution. The resolution is the goal, the purpose is the “why” and intentional habits become the “action plan” to get you there. To improve the likelihood of sticking with new habits, we should form ones that are not major deviations from our current lifestyle. Making a 1% change may not be noticeable or something to brag about, but they can be far more meaningful in the long run.

Once we master a new habit, we create another small habit that gets us one step closer to our resolution. This becomes a continues cycle of improvement that empowers and helps us become the person we want. A marathon is completed with many small steps, not a few giant leaps. We should view resolutions in a similar manner.

Today is the Best Day to Start

No matter what, today is the best day to start a habit that will improve your life. Why today? Because it isn’t tomorrow. When we are forming small habits, we don’t face uncomfortable or unnatural changes to our lifestyle. Hence, there is no reason to procrastinate the day of achieving our resolution.

– Scott

©2021 The Behavioral Finance Network. Used with permission.

1. https://www.forbes.com/sites/dandiamond/2013/01/01/just-8-of-people-achieve-their-new-years-resolutions-heres-how-they-did-it/?sh=7ad4ff8a596b

Humility, or I should say the lack of humility, is quality that is easy to identify in others, yet difficult to see in ourselves. Humility is a difficult quality to develop because it may threaten our sensitive egos. Ego is important; we all have one. Our very survival depends on what “I” do or what happens to “me”. In addition, a healthy ego gives us a sense of purpose, value and confidence.

However, our ego oftentimes dominates our thoughts and decisions as the desire to be right becomes our main prerogative. And whenever our intellect is on the line, we become even more protective of our ego. This is a completely normal and natural response, but just because it is normal doesn’t mean it is beneficial.

Developing Intellectual Humility

The most important part of developing intellectual humility is to acknowledge and respect uncertainty. This is true in all aspects of life, especially within the investment realm. This does not mean we can’t have strong opinions; it just means we need to recognize we could be wrong.

Being wrong doesn’t mean we are ignorant or less of a person; it doesn’t have to hurt our ego. There are many things outside our control that may influence an outcome. There is the role of luck/chance in outcomes. Information we rely on may be incomplete or misleading. And sometimes we simply misinterpret or misperceive a situation (we are human after all).

Investing Humbly

Acknowledging uncertainty, that we don’t know it all and that we could be wrong, helps us take a more thoughtful approach to decision making. It encourages greater due diligence, conservative assumptions and sharpens our focus.

Humility can help us stay true to our personal investment plan and it reduces the likelihood of making costly mistakes. And in my experience as an investment advisor, the greatest risk to reaching financial goals is making costly mistakes.

– Scott

©2021 The Behavioral Finance Network. Used with permission.

The color green is attributed to many positive things in life. Green is often used as a symbol of prosperity and even represents life itself. But not all green is good. Being green with envy is a characteristic we should avoid like the plague. As Charlie Munger put it, “There’s an old saying, ‘What good is envy? It’s the one sin you can’t have any fun at’. It’s 100% destructive.”¹

Envy is a feeling of resentment aroused by another’s circumstances, good fortune or outcomes. And it rears its ugly head frequently among participants in financial markets. It can creep up on any of us and can feel quite natural. But just because it may feel natural or an innate part of who we are, doesn’t mean it is advantageous.

In the past year there have been several securities and stories of quick wealth that may make us envious. Supersize gains, especially among people that don’t know what they are doing, can influence us to feel entitled to such gain. We may regret our “boring” investment strategy and envision how much quicker we can reach our goals by purchasing high flying securities. When we imagine significant gains, dopamine receptors are activated, which makes us feel good – as if whatever we do will be right.

Check Envy at the Door

Envy, when not checked, often leads to unhappiness and influences risky behavior as we seek what others have achieved, without respect to the role of luck in the initial outcome nor the probability that such luck will continue. We want it. We feel entitled to it. We are determined to get it.

The challenge is that there will always be someone, or some investment, that performs better than us. Hitting financial home runs and grand slams are exciting and activate many receptors in our brain. Building wealth through compounding is the financial singles and doubles – yawn inducing.

Envy is shroud in perpetual regret and disappointment. Sure, it may be exciting for a while. It may feel really good. But there is a cost to that feeling. Empirical evidence over decades shows that investors who chase what’s hot significantly underperform a more “boring” disciplined investment strategy.²

Feelings such as envy, which are natural, make investing difficult. It’s one reason why patience and discipline are the greatest virtues an investor can develop. It won’t be easy, but it is the best chance we have to achieve our financial goals.

– Scott

©2021 The Behavioral Finance Network. Used with permission.

1. Carlson, Ben. Don’t Fall For It: A Short History of Financial Scams. Page 69
2. JP Morgan. A Guide to the Markets. December 2020.

Investors often respond emotionally to the market. And whether that emotion is fear of loss or fear of missing out, it is powerful.

We are inclined to sell something that goes down and buy whatever is doing well. This has been going on for decades and continues to this day. It’s just about as reliable as the sun rising and setting.

There are studies that show investors who follow what is “hot” achieve a much lower return than an investor who sticks to a disciplined strategy. Despite that knowledge and proof, investors still chase performance, even to this day.

Historical Examples

• Fidelity Magellan fund in 1980’s had an average annual return of 29%. Yet, according to Peter Lynch, the average Magellan investor achieved a return of just 7% per year.
• The CGM Focus fund was the top performing mutual fund from 2000-2009 (an entire decade) – up more than 18% annually. However, the average CGM investor lost approximately 11% per year during that time period.

How does that happen? Because many investors chase returns. They buy in after great performance and then sell during periods of poor performance.

2020 Example

• ARK Innovation, a concentrated ETF in biotech and technology, is up roughly 160% this year. Yet, its managed assets are up nearly 900% for the year. How does that happen? Because investors are chasing the return!

Often our emotions overrule logic when investing. Even when we have facts, the fear of loss / fear of missing out has the potential to overpower rational thought. It may feel good at the time and can even appear to be the right decision for a season.

But that’s it – only for a season. And no one knows when that season will end. But what we do know is that such a “strategy” does not persist. Patience and discipline to your plan persist in the long run, and that is why I am always encouraging you to ignore the noise and stay the course.

– Scott

©2021 The Behavioral Finance Network. Used with permission.

Persistent (def) – continuing to exist or endure over a prolonged period

Wall Street forecasts lack persistence. Their shelf life may only be a few weeks or months at best. 2020 was a great example; once COVID hit, existing forecasts became worthless. And this happens just about every year – excuses abound as to why the “experts” got it wrong…again.

Despite their propensity to mislead investors, forecasts are alluring because they provide an illusion of certainty. And our brain wants certainty. The problem is that we are looking for certainty in the wrong place.

My forecast is persistent because it is based on enduring investment truths and investor behavior*. The news and markets change all the time; but this forecast does not. Not only is it reliable, it’s of immense value to help investors achieve their goals.

My 2021 Forecast

In full disclosure, this is nearly identical to my forecast for 2020 and years prior to that:

• The economy/market will do something that surprises us
• Investors who watch the market often will experience more stress than those that don’t
• You will be tempted to abandon your plan at some point based on expert forecasts and/or short-term market performance
• Investor behavior (discipline vs chasing what is hot/popular) will have a significant influence on total return – and is something in your complete control

Investing is simple, but not easy. It is difficult to stick with a strategy when it is out of favor. Patience and discipline are virtues because they aren’t easy, yet they are essential for your success. As your advisor, one of my most important roles is helping you decipher the noise from what really matters for your financial success.

I wish you a prosperous, fulfilling and happy 2021. Thank you for allowing me to be your trusted partner along the journey.

– Scott

*Click to read “The Cost of Emotional Investing”

©2021 The Behavioral Finance Network. Used with permission.

The next twelve months may be an especially interesting time. There is hope, but there is still much unknown. Let’s mind travel to December 2021. Next year at this time, we may look back and say, “Of course, how did I miss that”? This activity of jumping forward to look back is known as prospective hindsight.

The 1999 Tech Bubble

This was a time when profits didn’t matter. We didn’t wonder whether a technology stock would go higher, we wondered how quickly it would double in price. There was little perceived risk in the market. Then came the great bubble burst.

Looking back, it was obvious. How could profits not matter? “Growth at any price” was a short-term phenomenon. But it was near impossible to see that at the time.

The Financial Crisis

The financial crisis was another situation that is now obvious. The amount of leverage assumed nothing would go wrong. There were tranches of mortgage debt rated AAA by trusted agencies. What was there to worry about? Sure, the debt was enormous, but all looked good. Until it didn’t.

Our Current Situation

With vaccines on the horizon there is a lot of hope, but also a lot of questions. How long will it take to get back to normal? What additional stimulus will be provided? How much more economic damage will occur before we get out of this?

The bulls refer to the high levels of saving and pent-up demand. The bears point to the amount of debt and uncertainty over vaccine distribution. We don’t how this will unfold. We could grow out of this fairly quickly or we could face significant setbacks.

How Will We Miss It?

At some point in the future, we will look back and wonder how we missed something so obvious. If only we knew that now! This is why the best course of action is to ignore the predictions and follow your plan. There may be confident forecasts, but don’t kid yourself – no one really knows. Not even the “experts.”

There are cases, reasons, evidence and justifications for various potential outcomes. The present day will all make sense at some time in the future. We will wonder how we missed it.

Scott

 
 
©2020 The Behavioral Finance Network. Used with permission