Reaching Your Goals – for more of Carl’s insightful sketches on Behavioral Finance visit www.behaviorgap.com
Begin with the “WHY?”
Ask yourself these questions: Why are you earning, why are you saving, why are you investing??
I highly doubt you said, “So I can beat the SENSEX.”
What you probably said was something like, “So I can send my kids to college,” or “So I can retire early,” or “So I can take a trip around the world.”
And yet some investors’ actions seem to suggest they’re focused on something else: beating the market.
FOCUS is the key. Exhibit No. 1 – As Carl Richards (“The Behavior GAP”) says:
If we make beating the market our primary focus, it becomes incredibly difficult to behave. Instead of working towards something tangible that aligns with our values, we try to outguess what the market will do next. And that’s the kind of behaviour that can hurt our goals the most. In some ways, I suspect very few of us can afford to “beat the market” (whatever that means), particularly if we’re doing it at the expense of everything else we said mattered to us.
So when you’re tempted to play the game, I suggest you line up your goals and compare it to beating the market. Do you really want to give up one, or even all, for the chance (because it’s highly unlikely you will) of beating the market?
If you were travelling from Point A to Point B and if your only FOCUS was the SPEED at which you are going, this single-minded focus would come at a cost. And that COST would be a lack of control on your vehicle, and also a failure to focus on or take into account other important parameters like the fuel gauge, engine temperature, road conditions, etc.
Exhibit No. 2 – (I know I am making this long – but please stay with me for this knock-out punch)
I have used an anecdote from the 1949 book “The Intelligent Investor” by Benjamin Graham that sums up my point
(Graham was Warren Buffet’s guru described by Buffet as the second most influential person in his life after his own father) :
I once interviewed a group of retirees in Boca Raton, one of Florida’s wealthiest retirement communities. I asked these people mostly in their seventies – if they had beaten the market over their investing lifetimes. Some said yes, some said no; most weren’t sure. Then one man said, “Who cares? All I know is that my investments earned enough for me to end up in Boca”. Could there be a more perfect answer? After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs.
As Ben Graham says, “The best way to measure your financial success is NOT by whether you are beating the market but by whether you have put together a Financial Plan and a Behavioral Discipline that are likely to get you where you want to go”.
So that’s the Investment Idea for the month:
“In the end, what matters isn’t crossing the finishing line before anybody else but just making sure you do cross it.”
The next time you catch yourself asking “Am I beating the SENSEX?” pull out the piece of paper with your GOALS on it and SMILE.
Congratulations, you have now focused on the one thing that really matters.
Parting Thought:
Last year, Warren Buffet underperformed the S&P for only the ninth time in the 48 year history of Berkshire Hathaway. Though Buffet underperformed the benchmark about 20% of the times (mind you, this is only on a year to year basis) he does outperform it handsomely over the long-term (by a kick-ass factor of 78).
In other words, one’s corpus would have grown 78 times more had one invested in Berkshire Hathaway in 1964 as compared to S&P. Really mind -boggling whichever way you look at it.
And if Buffet cannot (or doesn’t care to) beat the index year on year, we are mere mortals.