Last week, I attended the Allan Gray Investment Summit, which brought together a range of investment professionals.
Most of the day was dedicated to experts discussing investment strategies and their top share picks. It was the final speaker of the day who left the greatest impression, yet at no point did he discuss markets or provide share tips. What he did was reveal the simple truth about investing.
Morgan Housel is the founder of the Collaborative Fund in the US and author of Everyone Believes It; Most Will Be Wrong and 50 Years in the Making: The Great Recession and Its Aftermath.
He started his speech by telling the story of two different investors. The first was about Grace, a woman who worked as a secretary her whole life. When she died in 2010, she left $7 million (R90.4 million at today’s exchange rate) to her heirs. The other was about Richard, a smart man who, at one point, headed an investment bank and earned a fortune. A week after Grace died, Richard filed for bankruptcy.
The point Housel makes is that Grace just followed the simple rules of wealth creation – spend less than you make, save the difference, buy a diverse portfolio of diverse companies and be patient.
Richard, on the other hand, was perhaps too clever for his own good, thinking there were better and faster ways to make money; or maybe he simply lived a lifestyle that he could not sustain. Whatever the reason, the truth is that Grace was better at managing money than the smart money guy.
According to Housel, there is no industry where it is possible for a layperson to outperform the person with the best credentials, yet it is possible when it comes to investing. This is because “it is not about what you know, but how you behave”. Unfortunately, human behaviour is hard to teach.
He uses an example of cancer research. Billions of dollars are spent each year on trying to find a cure for cancer, yet Robert Weinberg, one of world’s top cancer researchers, makes the simple point that, if you don’t get cancer, you are not going to die from it.
“Stopping people from smoking will have vastly more effect on cancer mortality than anything I could hope to do in my own lifetime,” said Weinberg.
“That’s a simple truth that we [doctors and researchers] sometimes overlook because it’s intellectually not very stimulating and exciting.”
In the same way, the best way to have more money is to spend less.
Housel went on to show the futility of trying to predict the future returns of the market and trying to find the “next big thing”. He quoted Nobel prize-winning economist Daniel Kahneman, who said: “Hindsight gives us the illusion that the world makes sense even when it does not make sense. This is why we create mistakes.”
Studies into which economic data is the best predictor of future market performance found that, well, there are no predictors.
The research looked at five-year market returns and back-tested whether any data – such as a country’s economic growth, previous market returns, economists’ growth predictions, corporate earnings and profit margins – could predict market returns over the subsequent five years. They found virtually no correlation. In fact, the random inclusion of annual rainfall had a higher correlation to market performance than any of those factors.
The best predictors, and even here it was a low correlation, were dividend yields, government debt levels and price to earnings ratios.
No one can claim to know where the market will be in five years, not even the experts. Take the rand as an example – who would have predicted that, given all the political and economic upheaval this year, the rand would be 5.8% stronger against the dollar over the past eight months?
So, what does this all mean? It means we spend way too much time trying to predict the future and not enough on our day-to-day finances. We spend way too much energy debating the merits of investing in Bitcoin and wasting money on forex courses, which we think will make us rich, instead of understanding our budgets and our spending behaviour.
Housel’s simple truths on making money
The best antidote to a world with low returns is to save more money. The flashy solution to low interest rates that everyone wants to hear is that a smart man in a nice suit has a new strategy to turn nothing into something, and he’d love to sell it to you. The simple answer no one wants to hear, but which is far more likely to help you, is that everyone should be saving more money to make up for low returns. It’s advice that is as effective as it is hard to swallow.
Value isn’t necessarily created by innovation or complexity. It’s created by solving people’s everyday problems for the longest period of time. This is why toilet paper and garlic powder have been better investments than some of the most innovative technologies. Lots of technology has solved many problems, but not as much as toothpaste and deodorant have, and will continue to do for the indefinite future.
Rand-cost averaging is the best way to not care what the market is doing. There is an industry, surely measured in the billions of dollars, devoted to extremely smart people making extremely complicated market forecasts with extremely dodgy results. The best advice no one wants to hear is that buying the same amount of stocks each month blends the highs and the lows, the cheap and the expensive, averaging out to a result that truly lets you not care what the market might do next.
Wealth has little to do with how much you earn and a lot to do with how you live. We’re all investors attempting to grow our net worth to gain more control over our time and possessions.
It’s a two-part equation: wealth versus wants and needs, however, not enough attention is given to the latter. The easiest way to grow wealthier is to learn to live with less, because living with less has a higher success rate than attempting to earn a fortune, and fortunes tend to push aspirations and desires higher anyway.
Source: Take a simple idea and take it seriously, published in The Motley Fool