Thursday, July 3, 1997
Two Brains, or Too
Much Brain?
by
[email protected]
As a recent discoverer of the Fool site I have spent the last couple of weeks reading through the 1997/1996 Fribbles (I know, I haven't got a life).
Although quite a lot of topics are touched upon over that time period, there are two main themes which obviously strike a chord with most Fools :
1. The overriding certainty and relative simplicity of regularly saving sums of money and watching this investment grow over long periods of time into substantial cash piles -- almost irrespective of the precise investment system utilised
2. The inability of many Fools (most Fools?) to simply leave it at that.
Although not medically qualified, reading those Fribbles I felt forced to offer a diagnosis of schizophrenia. Here was the discovery of a perfectly good, virtually certain, tremendously powerful, extremely simple, wealth-generating machine on the one side of this Foolish persona which is then subjected to the short-term, often disastrous, always costly, highly upsetting, nothing-but-adrenaline-generating gambling machine on the other side of the same persona.
How is this to be explained ?
There are many reasons which appear reasonable and will apply in whole or in part to most schizophrenic Fools. Boredom will be in there. The will to apply intellect is also there -- after all, when you've learnt something isn't it good to try it out. Impatience -- the will to see results sooner than over 10, 20, 30 years. Emulation -- if you've read Buffett and Lynch etc. you too want to be a player, you too want to score big time.
Now there is nothing wrong in trying to do something if you are bored. Equally, if someone tells you how to fly a kite then you will naturally want to try it out yourself. The timeframes required for compounding power are too long for our minds to comprehend -- I personally don't recall ever having planned anything at all over a 10, 20 or 30 year time horizon. The spirit of competition, of wanting to do as well or better than others, of wanting to beat returns from BTD or whatever is also entirely natural.
All of these motivations are understandable and are normally regarded in our education system and our wider society as entirely desirable. Why then do they appear to cause so many disastrous investment decisions -- as evidenced in so many heartfelt Fribbles ?
I do not know the answer. However, I will offer two guesses :
Firstly, most of us have not made the $Zillion which investing $X every month and watching it grow at Y% per annum over N years in a BTD-type approach will achieve. If we had it today, I am sure we would safeguard it. As the reality of this large amount is distanced in time, we do not feel we are jeopardising it by investing in other ways.
Secondly, I suspect (and it is certainly true in my case) that many Fools (irrespective of whether part of their investments are mechanically allocated in pre-determined time periods or not) do not have a strategy or a quantified set of objectives for their other investments. What this means is that anything other than a BTD-type mechanical approach, should have two clear statements :
1. How much am I going to invest ($) and with what evaluation system ? 2. What do I expect the value of my portfolio to be at a certain future date?
If you do not have this then you make a series of investments with often imperfect (often non-existent) research, motivated by different bits of information (directors buying heavily in one case, a change of management in another etc.) and, even worse, without any objectives in sight you do not judge whether you yourself are performing as you expected. All this leads to the consternation expressed in the Fribbles.
To me (now) there are only two ways of investing. a. The mechanical systems which deliver anything between 9% and 20% over long time periods. b. Investing in companies on which you have done your homework and where you are convinced you are buying an earnings stream at an attractive price. You may well have other ways of investing -- but decide on a system and be clear of what you expect to get out of it. Without this you will never know whether you and your system are as good as you think you ought to be.
I hope this will go some way towards alleviating the worst behavioural and neurotic symptoms of advanced investment schizophrenia.
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