long-term planning, Nothing's free, Beware of taking Financial Cues, pessimism

 

Long-term planning is harder than it seems because people’s goals and desires change over time.

Life is not that easy. Maybe you don't know for sure what is going to be happening in the future and fear comes in, paralyzes you. Therefore your desires change your goal changes. Long-term planning seems harder. But if you push, you can beat the odds stacked against you.

Imagining a goal is easy and fun. But in reality, to achieve it, it stresses the hell out and this has a big impact on making our decision in terms of life and financials.

Every five years old boy wants to drive a car or something, as they grow up they want to become lawyer or engineer or doctor or else and then they think their plan is set. They become doctors or engineers or lawyers. They have to work long hours and they couldn’t meet their family so they resigned. They take a flexible low-paying job. Then they think that childcare is so expensive so they stay at home. Then, finally, they conclude that they made the right choice. As the year passes, at the age of 70 or something they realized that a lifetime sitting at home means they are unable to afford the retirement. So you see how people change their goals and desires instead of sticking to one. Therefore the long-term plan is essential.

It’s hard to make enduring long-term decisions when your view of what you’ll want in the future is likely to shift. Harvard psychologist Daniel Gilbert once said "At every stage of our lives we make decisions that will profoundly influence the lives of the people we're going to become, and then when we become those people, we're not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on." So you can see how this can impact long-term financial plans.

Few things you should keep in mind while making a long-term financial decision: the first being, try to avoid acute ends. The second being, don't settle for less hoping that it would turn into a higher job. The third being, don’t blindly take history as a guide because it might wear you off to the acute ends. And the last being, don't make such a decision where you have to regret it later, evaluate the situation, try to think about it in a long-term scenario and then make a decision. Compounding work is astounding when you can give a plan years or decades or more to grow.

We should also come to accept the reality of changing our minds. Aim to give the moderate time of yours to every aspect of your life. Endurance is the key.

Nothing’s free.

Nothing’s free in this world even if it doesn’t appear on labels. If you say you want to do something, you want to lose weight, want to get in shape, get your business off the ground, you’d have to pay the price. Price doesn’t mean money, it also means your determination, hard work, discipline, your willingness, and consistency to achieve all these things. 

Most things are harder to practice than they are in theory. For example, investing money for a longer period and let it grow, seems easy when you are not the one who is investing. And sometimes we are not good enough at identifying what the price for success is, which prevents us from being able to pay.  People advise that if you want to earn 11% annually over the next 30 years so you can retire in peace. But there is a price that you have to pay which is a constant risk from the market. The market gives big returns but takes them away just as fast.  

There are three options that people see while investing their money. First being, you pay the price and accept the volatility of the market or second being, find an asset with less certainty and lower pay-off or third being, try to get the return while avoiding the volatility that comes along.  Most people try to choose the third option. They want to earn good returns but never want to pay the price. Few people get away with this but most of them will be caught and punished. Punished in the sense that while trying to avoid paying price they end up giving the double.

So you must think of market volatility as an investment fee rather than a fine and it is important for developing the kind of mindset that lets you stick around long enough for investment gains to work in your favor.

Beware of taking financial cues from people playing a different game than you are.

You must have heard about the dot-com bubble in the early 2000s which reduced household wealth by $6.2 trillion. It was a disaster. Many such bubbles have occurred and it will keep happening. Do you know why? because people are greedy, and it is an ineffaceable element of human nature.

People often invest with scarce information and without logic. The bubble is not some natural event but it is man-made and it is related to the rise and fall of the political party, where the outcome is known in hindsight but blame and cause are never agreed upon. And investors often take calls from other investors who are playing a different game than they are.

In finance, there is a notion which is assets have one rational price in the world and that seems innocent but has done many incalculable damages. Every investor has different goals and time horizons. If one has a 30-year horizon then he/she would look for the cash flow and strong fundamentals of stock over the next 30 years. If one wants to sell within a year then he/she would look for the current product sale cycle and whether we will have a bear market. If one is a day trader, he/she doesn't care much about everything and try to earn few bucks through the squeeze. So investors have different goals and visions, thus prices would look ridiculous to one person can make sense to another.

An iron rule of finance is that money chases returns to the greatest extent that it can. If an asset has momentum, it would attract short-term investors then they are off to the races. And when the momentum of short-term earns an extreme return, it would largely attract the long-term investors to invest in short-term and cycle goes on and on. Hence bubble forms. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another. Being thrown by the investors who play a different game than you can also throw you off your ability to spend money and ability to make good financial decisions.

A takeaway here is that don't blindly follow anyone else's strategy and always try to do your research and try to understand what's in it for them and you, then invest your money.

The seduction of pessimism.

“For reasons I have never understood, people like to hear that the world is going to hell.” —Historian Deirdre McCloskey.  Optimism plays a vital role for most people because the world tends to get better for most people. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. And though we disgrace pessimistic people but somewhere deep down pessimism holds a special place.

Pessimism isn't just common as optimism but it sounds smarter and it is paid more attention than optimism. Also, it is intellectually captivating.

After the 2008 economic crisis where stock markets of the world had collapsed and unemployment was surging. There were so many articles in the newspaper like the U.S. would break into pieces, New York would be part of an “Atlantic America” that might join the European Union and whatnot.  And this was not on the last page or at some corner of the newspaper but it was on the front page.  And the one who was posting stories with outrageous optimism was rarely taken seriously and laughed out of the room.

It’s okay to be pessimistic about the economy. History is full of such examples. Tell someone that everything would be great and going to be fine, they would ignore you. If you tell them that their life is in danger, they would give you their undivided attention. Matt Ridley wrote in his book The Rational Optimist:  “ a constant drumbeat of pessimism usually drowns out any triumphalist song ... If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. In my adult life... the fashionable reasons for pessimism changed, but the pessimism was constant.” You must be thinking that why am I promoting pessimism instead of optimism and how does it impact our thinking about money. I’ll tell you. There is a reason that pessimism help when dealing with money. It won't let you go too far with it and may save you from getting into trouble. Also a few other things make financial pessimism easy, common, and more persuasive than optimism. One is that money is ever-present, so something bad happening tends to affect everyone and captures everyone’s attention. Even if the person doesn’t know and doesn’t have any interest still these kinds of things grab one's attention. Another is that pessimists often extrapolate present trends without accounting for how markets adapt. Meaning assuming something ugly will stay ugly is an easy forecast to make. And it's persuasive because it doesn't require imagining the world is changing. A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore. Like in stock markets, where a 40% decline that takes place in six months will draw congressional investigations, but a 140% gain that takes place over six years can go virtually unnoticed. In short, optimism lets you see unapproachable dreams whereas pessimism makes you meet with reality.

 Stephen Hawking said in one of his interviews that “My expectations were reduced to zero when I was 21. Everything since then has been a bonus”. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.

When you will believe anything.

"If you believe it, you can achieve it" is something I hear a lot. If you believe you'll score excellent marks in your exam or you'll get through this interview and you'll get that job, you'll put your extra efforts to achieve it. And maybe you will get it. The mentioned quote works perfectly in this sense. But this doesn't work in every aspect of your life. 

At a personal level, people tend to want something to be true, the more likely they are to believe a story that overestimates the odds of it being true. For example, in Yemeni village Ali Hajaji’s son was sick. Elders in his Yemeni village proposed a folk remedy: shove the tip of a burning stick through his son’s chest to drain the sickness from his body. After the procedure, Hajaji told The New York Times: “When you have no money, and your son is sick, you’ll believe anything.”

It seems crazy, right? But if you want the solution so desperately and you won’t get one, and someone advised you to do something crazy, you’ll believe anything without even thinking about it.  The same thing happens with our financial decision also. When any famous investor says to buy/sell a certain stock, people heavily tend to buy/sell that stock and think that they'd become rich without any efforts. These may be low-probability bets but the problem is, what they want to be true is unequivocally true.

This is a big part of why room for error, flexibility, and financial independence are necessary because everyone has an incomplete view of the world. And you can’t beat the market.

Also, people try to look for the most understandable cause in everything they come across and they are wrong about a lot of them. They tend to fill in the gaps of that blind spots they have with the limited experiences they have had felt. And the one who’s confident he knows what’s happening based on what he sees but turns out to be completely wrong because he can’t know the stories going on inside everyone else’s head? He’s all of us.

Therefore define the game you’re playing, and make sure your actions are not being influenced by people playing a different game and don’t believe anything that you see. Find the right reason. Be smart. Don’t be a doofus.