Not So Obvious

Amar Pandit , CFA , CFP

I have been receiving some amazing feedback for the last 2 Posts – The 500 Year Plan – Part I and Part II. In fact, I continue to ask this question to every person I meet. And I will continue to ask this question till every person knows the answer to this question which they will come to know only if they have read these posts or are having a conversation with someone who has read this post. I guess I am going to be busy for a long time. In one such encounter, a 65 year old gentleman, Mr. Iyer (name changed) said, “All of this is nice, but I am sixty-five years old. I just have a decade or two. I don’t have 154 years as my time horizon.” This post explores my conversation with Mr. Iyer.

“That’s all-right Mr. Iyer. What do you think is your time horizon?”, I asked him.

He thought for a minute or two like it was a trick question and replied, “5 Years I guess.”

At this point, I thought of simply reproducing the conversation instead of ‘I said, he said’ sentences.

Amar: “Why is it 5 years? Are you planning to spend everything in the next 5 years?”

Mr. Iyer: “No No…I don’t intend on spending all of my fortune in the next 5 years. Do I look that crazy to you?”

Amar: “Not at all Mr. Iyer. But I still don’t understand, why is your time horizon only 5 years and not 10 or 20 or 30 years?”

Mr. Iyer: “Well, it can be, but I need monthly income from my investments, and I can’t take risks.”

Amar: “That’s interesting but I think we are jumping the gun here with the discussion of risk. That could be the topic for some other day. Let’s first arrive at your time horizon and what your actual need is over that period of time. For example, Lifestyle Expenses for as long as you live. Besides this, medical expenses for as long as you live.

Mr. Iyer: “Don’t forget inheritance for my children and some gifts for my grandchildren (aged 4 and 10). Besides this, I want to leave money behind for this charitable association.”

Amar: “Excellent. How long do you want to fund this charitable association?”

Mr. Iyer: “For as long as it exists…This institution has been there for 100+ years.”

Amar: “Did I hear you say for as long as it exists and that this institution has been around for 100+ years. Do you see where this is going?”

Mr. Iyer: “Ahh! I see the point. According to what I just told you, my time horizon for this charitable need itself can go for 100+ or more. I now see how 154 years is applicable to me or for that matter even 500.”

Amar: “You have nailed it. How about now looking at the time horizon in the context of your future generations – your children, grandchildren, and so on?

Mr. Iyer: “Now that you are making me think, I see that if I just consider my grandchildren and my desire to leave a legacy for them, my time horizon can be around 80-90 years. And if I think beyond my grandchildren, 154 does not seem to be such a tall order. When looked at in the context of multi-generational planning and all my needs (and wishes), I see a very long-time horizon for myself.

You were right. I was being short-sighted. Rather let me say this was my blind spot.”

Amar: “Well you are not the only one to have this blind spot. Many investors have it. The great thing is that you understand this now. Sadly, many don’t.

Most of us have not been taught to figure out the right time horizon for ourselves. Thus, we pick some arbitrary number when asked about our investment time horizon. At best, we think our investment time horizon is a function of our lives. On the contrary, our investment time horizon is a function of our needs (and wants) when we are alive and our wishes after we are gone.

Mr. Iyer: “I agree now. The only thing I am wondering now is “how did I miss this. Isn’t this obvious?”

To this, I responded with a Sherlock Holmes quote, “The world is full of obvious things which nobody by any chance ever observes.”

Morgan Housel in his book “The Psychology of Money” wrote, “None of the 2000 books picking apart Buffett’s success are titled This Guy Has Been Investing Consistently for 75 years. But we know that’s the key to the majority of his success. It’s just hard to wrap your head around that math because it’s not intuitive.

There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up and Wait. It’s just one page with a long-term chart of economic growth.

The practical takeaway is that the counter intuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies and unsuccessful investing attempts.”

Needless to say, we continue to pursue this stupidity of trying to earn the highest investment returns or scouting for the best investment or the best time to invest.

Because what should be obvious to us is after all not so obvious.