November 2022
So what does this have to do with investing? By definition, investing is built around our obsession with our future well-being. It is only by sacrificing our immediate desires and investing our hard-earned dollars over multiple years, and even decades, that we can make our future dreams a reality.
Given our distinctly human ability to sacrifice for our future—and the knowledge of what we’ll gain by that sacrifice—why is it so hard to focus on the long term over the short term? We believe mindset, which we’re going to focus on in this newsletter, is a huge factor.
To illustrate the difference mindset can have when it comes to prioritizing our future, let’s puta face to a “better” investor, who has a disciplined approach to planning for their future, versus a “lesser” investor, who lives distinctly in the moment.
When we think about thoughtful long-term investors, the world’s leading college endowments come to mind. As an example, the Harvard endowment’s mission is to be a “perpetual source of support for the University and its mission of teaching and research.” What can be more long-term and future-oriented than the word “perpetual”?
Harvard is investing not only for current students but also for generations to come. Because of this, its mindset has to be heavily focused on the future. This is in direct contrast to Jeff Spicoli, the Sean Penn character from the early 1980s movie classic Fast Times at Ridgemont High, who is obsessed with the present at the expense of his long-term future. He would much rather spend his time having fun partying and surfing rather than focusing on studying and graduating high school.
Let’s focus on three key ways that “better” investors have a superior mindset when it comes to their investment approach.
Having a vision is crucial to long-term investing success. In its mission statement, Harvard has a purpose, or North Star, that’s clearly defined
Spicoli, the “lesser” investor, has no long-term vision or North Star to guide him. He aimlessly wanders through the delights of the present without investing for his future. In fact, when he does luck into some money, he immediately spends all of it on a famous rock band for his birthday party.
We’ve found that when individual shave a clearly defined purpose, they are much less likely to veer from their path in response to short-term temptations. This is why creating a financial plan and setting goals for what you are looking to accomplish are so crucial. In contrast, if investors have not discovered the purpose behind their wealth, they’ll default towards treating money as just a number and more readily alter their courses. Treating wealth as just a number reinforces short-term thinking, which takes us to the next point on the “better” investor’s approach.
Life is a constant tug-of-war between your short-term emotions and your long-term values and goals. When striving for anything that is worthwhile in life, success takes hard work, discipline, and patience. Think about your health, specifically your exercise or diet regimen. Will you be successful if you regularly give in to your short-term emotions of restlessness or laziness, or will you be more successful when you are patient and disciplined?
Investing itself is no different. “Better” investors, like endowments, are able to compartmentalize those short-term emotions that are instinctual to all of us (but which “lesser” investors, like Spicoli, let drive their decisions), such as fear, greed, and FOMO. Instead, since “better” investors have a North Star to guide their path, they let their long-term values of patience, discipline, and the pursuit of knowledge drive their investment decisions. When a portfolio is constructed with these long-term values in mind, its actual makeup will look very different than a simple stock and bond portfolio. In future newsletters, I’ll delve more into how endowments’ fixation on the future guides them to embrace investments outside of the traditional norm.
We live in a sound-bite world where the short-term is glamorized at the expense of long-term investing success. The media is financially incentivized to elicit emotions in their viewers and they do this by sensationalizing short-term phenomena (e.g., best/worst performing stock of the day). Such noise is not just distracting but also reinforces short-term, emotional judgements at the expense of more thoughtful, long-term decisions.
Similarly, our friends and family may inadvertently encourage short-term, emotional decision-making that can be harmful to our long-term financial well-being. We all know people who have made a lot of money in an investment and are quick to share these anecdotes of instant riches far and wide. Of course, we rarely hear about their likely much more frequent failures. These “hot tips” feed into our emotions of greed, jealousy, and FOMO.
What do endowments do to combat these external pressures? They tune out the noise and, instead of putting misplaced energy on such short-term distractions, they focus on the hard work necessary to craft well-designed portfolios that are aligned with their long-term vision.
The focus of this newsletter has been on our investment mindset as opposed to our investment strategy(stocks vs. bonds, domestic vs. international, alternatives, etc.). And while strategy is, of course, crucial to any endeavor you want to master, it all starts with mindset. We can have the best dieting strategy in the world, but if we don’t start the diet with the right mindset, our short-term emotions will get the best of us, and that freshly baked baguette will be devoured in one sitting.
This takes us to the formula we follow at Morton Wealth:
And the order to the formula matters. Successfully executing on a strategy has to start with the right mindset. If you take the time to develop your mission or North Star, let your values and goals (as opposed to emotions) guide your investment decisions, and tune out the noise of external pressures, the right strategy will be much easier to follow.
In the next edition of this Perspective newsletter, I will dive deeper into the strategy component of Morton’s equation, focusing on how drastically different a “better” investor invests versus a “lesser” investor.
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Last year Jeff was selected to join Forbes Financial Council, a community of respected leaders who are selected based on their thought leadership and depth and diversity of experience in the financial services industry.
Forbes recently published an abridged version of his Perspective newsletter, highlighting the second vital component to the Better Investor formula: The Right Strategy. Click here to read the full article.
Check out The Financial Commute episodes featuring Jeff:
