On a long enough timeline, your chances of getting wealthy are close to 100%.
Wealth accumulation is the ultimate long game. If you stick with it for long enough, there are only 2 outcomes. One is that you get wealthy (compared to where you are now). The other is that the world as we know it ends and if that happens, who cares about money??
Yes, there are a few people that win the lottery and get rich overnight. But those people usually end up losing that money. They never learned to think long-term. They weren’t ready to be rich; they haven’t done the work. So they self-sabotage and put themselves back to where they were before.
Short term thinking is the dragon that you must tame…you can’t slay it because it never goes away 100%.
As you may have noticed, stockmarkets have been falling recently. Cue panic by nervous rookie investors followed by messages of reassurance by others. We might be at the start of a long bear market or the start of a new leg to the bull market. Nothing new there, we always face an unknowable future.
Making the bull case at a time like this is a dirty job but someone’s gotta do it. We often hear that the market has become over-stretched since the last big crash in 2009 and the gains since then aren’t based on fundamentals, they’re all based on [insert central bank conspiracy theory here].
But over the long-term, technological progress, cash generation and rising dividends drive the market up. As someone that naturally see the glass as half empty, I found the graph below from Morgan Housel rather soothing.
Note that the graph shows a period of 10 years. Beware of any graphs of a shorter period than this. If you read the mainstream media, there’ll be graphs of falls lasting days and weeks. Those graphs are not just useless: they are actively harmful. They’ll eventually turn you into a short-term gibbering wreck. No news is good news.
Living through a stockmarket downturn is a time horizon problem. Stockmarket investing is pretty-much guaranteed to work over a period of decades. But over days and weeks its pretty much a coin flip whether your investments go up or down.
Reframing helps. Reframing means looking at a situation a different way. To reframe a problem, you may need to get an external perspective. Or a lightbulb moment of creativity to rethink a problem that has been bouncing around in your head.
If you zoom out and look at the progress of mankind from the perspective of history, it’s obvious that this is the best time ever to be alive.
For perspective, go watch the film Darkest Hour. The film tells the story of Spring 1940 when German armies were sweeping across Western Europe and the situation for Britain looked hopeless. Victory was far from inevitable then. The entire British professional army (about 300,000 men) was trapped in a small area around the beach at Dunkirk facing massacre by the advancing German forces.
Churchill was urged by “sensible” people all around him in the government to negotiate a deal with Hitler. Past government’s failure to prepare for war meant Churchill was dealt a lousy hand. But he played that hand masterfully: bluffing like a pro and stalling for enough time for the facts on the ground to change.
It was not British fighting spirit that beat Hitler. No, that alone would have been nowhere near enough. We needed time, luck and allies and boy did we get those when Hitler launched his Eastern Front against Russia (and Japan attacked Pearl Harbour). Talk about self-sabotage. Up to that point, Hitler had a winning hand of cards.
The thing that makes Churchill such an interesting character was that, away from the bulldog public image, he was beset with crippling bouts of depression and self-doubt (I’m not sure that his diet and heavy drinking helped 😉 ). Churchill had to fight his inner demons to be able to fight his external circumstances.
Back to today. It’s ironic that, at a time when life in the West is safer than ever, we worry more than ever. As someone who used to do a lot of catastrophising, I know it’s possible to re-wire your brain and change the way you see the world because I’ve done it myself.
Your mind will throw lots of scary thoughts at you. That doesn’t mean they are true. Scary thoughts are like clouds in the sky…they temporarily block the sun…until the wind blows them along and the sun comes out again. Here’s the point: the sun was always there…you just lost sight of it for a while.
I recently had a lightbulb moment in my own not-so-historic struggle to lose weight. I’d been eating (mostly) clean and tracking everything I ate. Then I weighed myself one morning (after eating Chinese takeaway the night before) and my weight had gone up 3 pounds! ARRRGGHH!!! What’s the point?!? In that moment, I almost gave up. Then I realised: as long as I stick to my process, VICTORY IS INEVITABLE.
There is no failure, only feedback. Now I know how my body reacts to that bright orange
sugar syrup “sweet and sour sauce”. Not well, as it turns out. Lesson learned.
Focusing too much on daily weight movements is short-term thinking. And is weight even the right metric to be tracking? The aim of the game is a lower % of body fat and a higher % of muscle. Muscle weighs more than fat so you can actually gain weight whilst still making progress.
The problem with having the wrong goals is that they set you up for failure. If you set a goal of having your net worth go up every month, then during a bear market, you will “fail”. That right there is The Dip: its most people’s trigger for giving up.
What gets measured, gets managed. So its really important to measure the right stuff. Measuring your net worth is a good idea. But it’s not enough. Just as when driving you need to keep an eye on a number of dials on the dashboard, it’s a mistake to look at only one metric in personal finance.
What else should you be measuring? Well, what about measuring the % of your net salary that you save, the £/$/€ amounts invested in the year to date, fund units bought, annual investment income etc etc?
As long as you don’t sell out during a downturn and you keep to The Path, you are making real progress. Even better is to keep feeding cash into the market over time. If the market falls, you’ll be picking up more units at a lower price. You are getting closer to victory.
You can only control the process not the outcome. Focus on the process. It’s like they say at Alcoholics Anonymous:
God, grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.
Let’s finish with a Buddhist perspective. The past is gone and the future is unknowable. That leaves us with the present moment. It is by taking care of the present moment that we take care of the future. The future is just a series of present moments stretching out in time.
NOW is the moment of power. Now is the time to plant a seed that will provide you with shade in 10, 20 or 30 years time. The right way to channel your short-term thinking is to do something useful right now: call a client, earn some money, track your spending, start investing in the stockmarket. Or, even better, invest in yourself.
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