One particular translation of Proverbs 13-11 strikes a harmonizing chord: “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” I suppose the fable of the tortoise and the hare would be the moral equivalent for those more materialistically inclined.
Whether religious or secular, the underlying message is patently true: Wealth capable of transcending generations requires time to accumulate and perpetuate. Only the process of continual, incremental compounding ensures permanent wealth; continual compounding requires time.
Patently true, and yet so repeatedly ignored. To sell the wonders of continual, patience-demanding compounding is to sell the consumer on the joys of exodontia. Takers are few and far between. Patience is the tortoise, immediate gratification is the hare. Guess where investors are most wanting to place their bet?
Investment advice is rarely sold on the true but prosaic: “Earn an Average 9% to 11% Annually and Retire a Millionaire in 30 Years.” No, it’s sold on the immediate and fantastical: “The Next IIPR and a 1,400% Return”, “Most Obvious 10X Opportunity I’ve Seen”, “AI Stock With 38X Growth Potential”, “Buy BESS Before It Explodes 12,100%.” (These are actual marketing-copy headlines.)
Before wagging an accusatory finger at the industry, consider the return on investment from the seller’s vantage point. If the true and prosaic worked, the marketing dollars would flow in that direction. It doesn't, and they don’t. Managing customer acquisition can be a make-or-break proposition. To allocate dollars to effete marketing is to commit business suicide. The immediate and fantastical are proven to produce signatures on the bottom line. If a finger is to be wagged, it should be wagged in the direction of the investor. He or she demands stories of sugarplum fairies, and that’s what he or she gets.
An S&P 500 Index ETF or the prospect of the next Tesla, and with it the prospect of doubling money every six months? Please, the choice is too obvious to even the middling copywriter. Next is what’s new, and what’s new empowers the imagination to run rampant. New enters the world without the millstone of an observable history to limit the imagination to limited wealth: Meme, EV, and cannabis stocks; SPACs, cryptocurrencies have been the enticing new themes over the past year. They have sold thousands of newsletters and generated millions in financial-advisory revenue.
In my 35-year investing career, I’ve seen little good come of investing in what’s new. The visionary pioneers, enthusiastic and determined at the start, are frequently exhausted by the energy required to matchet a path forward. They all to the wayside. The subsequent settlers, having learned from their predecessors’ foibles and mishaps, venture onto the cleared terrain to prosper. Sustainable wealth is created by these second-iteration settlers who appear a few years later: Google over Yahoo, Facebook over MySpace, Apple over Nokia, Dell over Compaq, Tesla over Volt, Amazon over Webvan. The list goes on.
Someone must make a 12,100% return betting on those rare successful pioneers? A select few do, most don’t. Most investors hesitate to jump aboard until the market euphoria (and share price) is at an apex. The apex of euphoria correlates with the apex of potential. Both soon wane because of the real drudgery and process-impeding associated with backtracking, mistake correcting, and roadblock hurdling. Investor and management fatigue set in, share prices. Hopeful investors wait for the pioneers to regroup and rejoin the expedition, failing to realize many are permanently spent. A hollowed husk is all that remains. Buy high and sell low, in other words.
Patience is a virtue, It’s also a nuisance, which is why it’s in short supply. Investors who jumped aboard the wagons of the persevering few, jump off too early. They sell the shares after a 50% gain in 50 days or at the first dip after a strong run. Had they hung around for a while, knowing they are participating in a marathon, not a sprint, that 12,100% return might have materialized (over years, of course).
Hubris, unlike patience, is always in ample supply. I did it once, I'll do it again. The attitude is similar to that of the Las Vegas gambler who lucks into initial success. Our gambler turns $1,000 into $10,000 on the first spin of the roulette wheel. Emboldened by his instant fortune, he continues to spin. Our similarly emboldened investor likewise continues to invest in the pioneers. A few hours later, our gambler is no longer emboldened, having turned his $1,000-to-$10,000 stake into a $500 loss. The hubristic-turned-desperate investor finds himself in similar straights with his recurrent bets on losing pioneers.
There are always exceptions, of course, just as there are always million-dollar lottery winners. I pity both when they lack the requisite maturity to protect the windfall. Anyone who has accumulated any measurable wealth knows what's measurable sends a signal to unseen market forces to start plotting to separate the capital owner from his capital.
An immediate windfall from a stock pick, like that of a winning lottery ticket or an inheritance, is frequently more curse than blessing, as studies show. Windfalls warp perception. Return expectations rise unrealistically. (I speak from experience. An investor – an institutional one at that – once emailed to inquire whether a dividend-capture strategy a company I worked with was promoting could generate 15% monthly returns. A ridiculous inquiry: a $10,000 investment compounding at 15% monthly compound to $53,502 in a year. It would compound to $43,839,987 at the end of five years.)
I have learned to curb my enthusiasm and runaway egoism, perhaps to the point of paranoia. I feel no euphoria on the occasions when a stock I own doubles unexpectedly or when a share price spikes by double-digit percentages over a few trading days. Anxiety is the more likely feeling: Now what? Ride the shares higher? Sell and book a profit? What are the alternatives if I sell? And taxes?
Emotions guide actions. You can be sure emotions guide the actions of the hare-chasing, pioneer-smitten investor. Fear of missing out, headlines good and bad, daily doses of meaningless economic data, the stupefying feed of conflicting guru punditry ensure emotions are continually sensitive. The more sensitized the emotions, the more whimsical the behavior. Whimsy and investing success mix like oil and water.
The disciplined investor who incorporates the tortoise approach will typically feel nothing. An extended time frame tempers emotions. When is anyone overwhelmed by emotion watching grass growing?
A 25-year-old investor starts with $2,000 in annual contributions in an IRA. He increases his initial $2,000 by $500 annually until it reaches the $6,000 annual maximum. hecontinues to invest $6,000 annually thereafter. When he reaches age 50, he increases the annual contribution to $7,000 (the maximum for those age 50 and older) and invests that amount annually through age 59. He has invested $202,000 over 35 years.
That $202,000 earns 10% annually on average in a broad-based index stock fund. Was it all worthwhile? How do you define worthwhile?
Our investor’s $202,000 has grown to $1.5 million by the time he enters his 60th year. Even if he does nothing more (ceasing his annual contributions), his $1.5 million will advance to $$2.46 million by the time he’s 65. Our tortoise-strategy investor will have experienced recessions, bear markets, geopolitical crises, financial crises, wars, paradigm-shifting technology, democrat and republican majorities, repeated predictions of economic collapse, pandemics along the way. He will also likely have experienced little sleep deprivation or anxiety.
I'll concede the Proverb 13-11 (or tortoise) directive can feel like an exercise in futility: it’s a grind with impalpable reward for the first 25 years. The investor must wait until age 56 to reach millionaire status. But then patience proves its virtue. Terminal velocity kicks in, and then serious wealth (with sustainable hare-like growth) compounding occurs. The portfolio nearly grows by another million to $2.5 million by age 65 (remember that he stopped contributing when age 59) and then it's onward and upward to $4 million at age 70.
Whether religious or secular, the underlying message is patently true: Wealth capable of transcending generations requires time to accumulate and perpetuate. Only the process of continual, incremental compounding ensures permanent wealth; continual compounding requires time.
Patently true, and yet so repeatedly ignored. To sell the wonders of continual, patience-demanding compounding is to sell the consumer on the joys of exodontia. Takers are few and far between. Patience is the tortoise, immediate gratification is the hare. Guess where investors are most wanting to place their bet?
Investment advice is rarely sold on the true but prosaic: “Earn an Average 9% to 11% Annually and Retire a Millionaire in 30 Years.” No, it’s sold on the immediate and fantastical: “The Next IIPR and a 1,400% Return”, “Most Obvious 10X Opportunity I’ve Seen”, “AI Stock With 38X Growth Potential”, “Buy BESS Before It Explodes 12,100%.” (These are actual marketing-copy headlines.)
Before wagging an accusatory finger at the industry, consider the return on investment from the seller’s vantage point. If the true and prosaic worked, the marketing dollars would flow in that direction. It doesn't, and they don’t. Managing customer acquisition can be a make-or-break proposition. To allocate dollars to effete marketing is to commit business suicide. The immediate and fantastical are proven to produce signatures on the bottom line. If a finger is to be wagged, it should be wagged in the direction of the investor. He or she demands stories of sugarplum fairies, and that’s what he or she gets.
An S&P 500 Index ETF or the prospect of the next Tesla, and with it the prospect of doubling money every six months? Please, the choice is too obvious to even the middling copywriter. Next is what’s new, and what’s new empowers the imagination to run rampant. New enters the world without the millstone of an observable history to limit the imagination to limited wealth: Meme, EV, and cannabis stocks; SPACs, cryptocurrencies have been the enticing new themes over the past year. They have sold thousands of newsletters and generated millions in financial-advisory revenue.
In my 35-year investing career, I’ve seen little good come of investing in what’s new. The visionary pioneers, enthusiastic and determined at the start, are frequently exhausted by the energy required to matchet a path forward. They all to the wayside. The subsequent settlers, having learned from their predecessors’ foibles and mishaps, venture onto the cleared terrain to prosper. Sustainable wealth is created by these second-iteration settlers who appear a few years later: Google over Yahoo, Facebook over MySpace, Apple over Nokia, Dell over Compaq, Tesla over Volt, Amazon over Webvan. The list goes on.
Someone must make a 12,100% return betting on those rare successful pioneers? A select few do, most don’t. Most investors hesitate to jump aboard until the market euphoria (and share price) is at an apex. The apex of euphoria correlates with the apex of potential. Both soon wane because of the real drudgery and process-impeding associated with backtracking, mistake correcting, and roadblock hurdling. Investor and management fatigue set in, share prices. Hopeful investors wait for the pioneers to regroup and rejoin the expedition, failing to realize many are permanently spent. A hollowed husk is all that remains. Buy high and sell low, in other words.
Patience is a virtue, It’s also a nuisance, which is why it’s in short supply. Investors who jumped aboard the wagons of the persevering few, jump off too early. They sell the shares after a 50% gain in 50 days or at the first dip after a strong run. Had they hung around for a while, knowing they are participating in a marathon, not a sprint, that 12,100% return might have materialized (over years, of course).
Hubris, unlike patience, is always in ample supply. I did it once, I'll do it again. The attitude is similar to that of the Las Vegas gambler who lucks into initial success. Our gambler turns $1,000 into $10,000 on the first spin of the roulette wheel. Emboldened by his instant fortune, he continues to spin. Our similarly emboldened investor likewise continues to invest in the pioneers. A few hours later, our gambler is no longer emboldened, having turned his $1,000-to-$10,000 stake into a $500 loss. The hubristic-turned-desperate investor finds himself in similar straights with his recurrent bets on losing pioneers.
There are always exceptions, of course, just as there are always million-dollar lottery winners. I pity both when they lack the requisite maturity to protect the windfall. Anyone who has accumulated any measurable wealth knows what's measurable sends a signal to unseen market forces to start plotting to separate the capital owner from his capital.
An immediate windfall from a stock pick, like that of a winning lottery ticket or an inheritance, is frequently more curse than blessing, as studies show. Windfalls warp perception. Return expectations rise unrealistically. (I speak from experience. An investor – an institutional one at that – once emailed to inquire whether a dividend-capture strategy a company I worked with was promoting could generate 15% monthly returns. A ridiculous inquiry: a $10,000 investment compounding at 15% monthly compound to $53,502 in a year. It would compound to $43,839,987 at the end of five years.)
I have learned to curb my enthusiasm and runaway egoism, perhaps to the point of paranoia. I feel no euphoria on the occasions when a stock I own doubles unexpectedly or when a share price spikes by double-digit percentages over a few trading days. Anxiety is the more likely feeling: Now what? Ride the shares higher? Sell and book a profit? What are the alternatives if I sell? And taxes?
Emotions guide actions. You can be sure emotions guide the actions of the hare-chasing, pioneer-smitten investor. Fear of missing out, headlines good and bad, daily doses of meaningless economic data, the stupefying feed of conflicting guru punditry ensure emotions are continually sensitive. The more sensitized the emotions, the more whimsical the behavior. Whimsy and investing success mix like oil and water.
The disciplined investor who incorporates the tortoise approach will typically feel nothing. An extended time frame tempers emotions. When is anyone overwhelmed by emotion watching grass growing?
A 25-year-old investor starts with $2,000 in annual contributions in an IRA. He increases his initial $2,000 by $500 annually until it reaches the $6,000 annual maximum. hecontinues to invest $6,000 annually thereafter. When he reaches age 50, he increases the annual contribution to $7,000 (the maximum for those age 50 and older) and invests that amount annually through age 59. He has invested $202,000 over 35 years.
That $202,000 earns 10% annually on average in a broad-based index stock fund. Was it all worthwhile? How do you define worthwhile?
Our investor’s $202,000 has grown to $1.5 million by the time he enters his 60th year. Even if he does nothing more (ceasing his annual contributions), his $1.5 million will advance to $$2.46 million by the time he’s 65. Our tortoise-strategy investor will have experienced recessions, bear markets, geopolitical crises, financial crises, wars, paradigm-shifting technology, democrat and republican majorities, repeated predictions of economic collapse, pandemics along the way. He will also likely have experienced little sleep deprivation or anxiety.
I'll concede the Proverb 13-11 (or tortoise) directive can feel like an exercise in futility: it’s a grind with impalpable reward for the first 25 years. The investor must wait until age 56 to reach millionaire status. But then patience proves its virtue. Terminal velocity kicks in, and then serious wealth (with sustainable hare-like growth) compounding occurs. The portfolio nearly grows by another million to $2.5 million by age 65 (remember that he stopped contributing when age 59) and then it's onward and upward to $4 million at age 70.
Proverbs 13-11 (or tortoise) satisfies a moral imperative. A psychic profit arises because the investor knows he traveled the lonely road paved with patience and discipline. And for those with a more materialistic bent who have traveled the same road, there’s always a celebratory debauch to the South Pacific to generate a similar psychic rush.
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