Don’t be a Jim. Behave like Sue.
Last Tuesday, I had written a post “There will always be reasons for not Investing”. Today, I thought of writing a very simple yet powerful concept that I believe is worth gold to an Investor (or Diamond if you are into Diamonds). I promise it has got something to do with Jim and Sue.
We all obsess about the right time to invest or the best time to invest. The right time to invest was Yesterday. The next best is Today and the next best after today is tomorrow. I am sure you are getting the drift of what I am trying to say. I am saying that any day is a great day to invest if your time horizon is long enough and if you can leave compounding alone. The problem with most investors is that they plant the seeds today and dig them out tomorrow. The external noise created by people who do not know you or your situation has a significant impact on the way you behave. When the financial pornographic network screams “Fear”, many people rush to dig out their seeds. Thus, they are never able to grow their Money Plant or Tree and end up with poor investing experiences. Instead of learning the right way to grow a Tree, they stop growing Trees altogether or look for shortcuts to grow Trees. You may now be thinking “What has this got to do with Jim and Sue? Tell me about them.”
In the book “The Psychology of Money”, Author Morgan Housel has used fictional characters Jim and Sue in one of the chapters to make a point. He says “You could invest $1 into the U.S. stock market every month, rain or shine. It does not matter if economists are screaming about a looming recession or new bear marketing. You just keep investing. Let us call an investor who does this Sue. But maybe investing in a recession is too scary. So, you invest $1 every month when the economy is not in a recession, sell everything when it’s in a recession and save your monthly dollar in cash, and invest everything back into the stock market when the recession ends. We call this investor Jim”. I believe I have now set the stage for you to understand these 2 characters. There is a third one Tom, but I will not waste words on this guy. Sue and Jim are good enough to make my point.
Who do you think has more money over a period of several decades? I bet many of you would be thinking that Jim would have more money. In fact, it perfectly makes sense, and we are confident that Jim will have more. He invests before recessions, comes out in recessions, and then invests back when the recession ends. After all, is this not what most investors try to do. Now, how much money do you think Sue and Jim end up with over time? Morgan Housel has taken the months between 1900 and 2019. According to him there were 1428 months between these dates. Over 300 of them were during a recession.
Sue’s total comes to $435,551
Jim’s total comes to $257,386
There is no real competition here as Sue ends up with 70% more than Jim. Can you even believe this?
I fail to understand if it is this simple, why do we not end up doing it. I said it was simple but not easy. Just like it is simple to know we need to exercise; it is not easy to exercise day in and day out. Just because something is simple does not make it easy. Sue had to remain calm 22% of the time the economy was in or near recession. Do you think this is easy? Just think back about February – April 2020. How easy was it for you to remain calm? This brings me to another point. Think back about the period from September 2008- March 2009. When you go through it, it feels like the end of the world. Do you feel anything about it now? I bet for many (unless you were wiped off), it is just a date; we do not even feel anything. It is like every other period. However, when we are going through it, the feeling is very different. Thus, though it sounds simple, it is not easy to stay calm like Sue.
Thus, I strongly believe that volatility is the cost of investing and we all have to pay it. We have to remain calm or find a real professional who can help us remain calm during such events. It is absolutely normal to feel anxiety in such times, but your investing outcomes will be dictated by whether you chose to dig out the seeds or chose to stay put. How a pilot behaves in moments of turbulence is far more important than how she behaves in the entire period when the flight is on autopilot or cruise control. Similarly, how you behave in turbulent markets is far more critical than how you behave during the regular times. Thus, how you behave(d) in 2020 will be extremely important to your investing outcomes over the next decade and beyond.
The question then you should be asking yourself is “Who do I want to be like? Sue or Jim”.