This month, Steve draws on the wisdom of great thinkers of the past and present to highlight the role of feelings vs statistics when it comes to investing.
We believe in investing in the great companies of the world, as over centuries, these companies have earned in excess of inflation, consistently. This, my learned friends, is a fact.
Brainy people 🧠 know that statistics are the only proof we have and that looking at ‘the data’ is most likely to give better outcomes rather than trusting in gut feel.
Intelligent 🧠 people also know that acting upon feelings doesn’t bring the best results. I’m sure you have a memory, maybe unspoken, of where you have acted upon your feelings and ended up with egg on your face. I’ve got tonnes! Give me a shout and I’ll happily tell you an amusing story or two of my emotional ineptitude.
Don’t worry, this is not an article to tell you to ignore your feelings. I want you to embrace them but also manage them. To do so, we will look at the great thinkers of the past, present and future. A talented trio that will teach us to feel the pain and do the right thing anyway.
That’s right, you’ve guessed them all!
Bruce Lee
Ru Paul
Obi-wan Kenobi
The Present: 'Feelings are not facts, honey' - Ru Paul
Ru Paul says it best. What we are feeling is not necessarily factual. In fact, it’s probably wrong. And that’s ok, we all get these feelings that are essentially a shortcut on the hard things in life. As you are well aware, the world is hard! We need these shortcuts to get through the tough stuff as quickly as possible and make us feel good again. After all, what is life for if not for feeling good… this is our goal!
The Past - 'Don’t think, feeeeellll’ - Bruce Lee
I grew up in the 80s watching Bruce Lee. He taught me many things, mainly how to karate chop my little brother into submission and stare into the distance with a quivering cheek. I still have that skill and due to ever-increasing size of chins and jowls, the quiver is getting ever-more impressive.
Bruce was all about using your emotions to maximise physical and mental output. He said we need ‘emotional content’ to maximise our strengths. Isn’t that true? When you do something with feeling, it means so much more whether you are successful or fail at it. We often go through the motions and limply accept the outcome.
I don’t think any of you want to limply accept the outcome of your actions (more likely inaction) but when it comes to investing, without putting in the thinking with emotional content, poorer outcomes will surely occur.
And I ain’t having it!! I won’t let you make investment mistakes without understanding things properly.
That, my friends, is my emotional content and feeling that I will put into you and what you want to do with your life. Your ‘emotional content’ should come in living the best life possible and not in making investment decisions. The emotional content should be reserved for life, not for investment decisions.
Why am I talking about this? Bank interest rates have been going up to combat inflation. Inflation destroys your wealth, like carbon monoxide. A silent and pain-free killer that you don’t notice until you’re skint and having a much worse life due to your money losing purchasing power.
You don’t want that
I don’t want that
Bruce wouldn’t want it
As ever, in periods of poor performance, there’s been a handful of people thinking they should withdraw money from their shares and put in a bank account. They argue that investments have gone down in value and cash in the bank gets 6%.
They are right! Investments were down in 2022 but they are up so far in 2023! It’s cruddy but it is something that we must expect with investing, this is the very reason you end up with more, if you stick to your guns. Why? Because if there wasn’t a history of being better off by doing so, no one would invest, would they? Do you want to be the one that takes the loss to the benefit of those that remain invested? As that is what you are doing if you withdraw money.
But what they aren’t seeing is that the cash deposit rate of 6% wasn’t available a year ago. That’s what’s available from now on (until they fall at some point; even inflation is quelled). Yet they are comparing previous returns of their equity investments.
They are comparing a future outcome with a past one.
The future outcome of share portfolios is unknown. But the historical average is 10%
But Steve, why would I take a chance with the returns when I can definitely get 6%?
Exactly! Inflation to July was 6.8%… that means you are definitely losing 0.8% of the purchasing power of your money.
The risk of putting money in cash is:
Inflation-rate risk - inflation is more than the interest rate you receive.
Interest-rate risk - you lock on an interest rate and they get higher as high inflation is sustained. 6% looks good after a decade of 1% but not so great when you can get 9%!!!
Equity markets can increase by 20%, 30% or 40% in one year. When do these large jumps forward occur? That’s right, usually after a loss. By coming out to cash, you are potentially missing out on that. I’m not saying that will happen, but that’s a risk and eventually the returns, as usual, will revert to the mean of 10% a year.
Brainy 🧠 Bruce said that:
“It is like a finger pointing to the moon. Don’t concentrate on the finger or you will miss all that heavenly glory”
For those of you who are not moved by 70’s Kung Fu, Heavenly Glory or the One-Inch Punch, perhaps this will help:
Warren Buffett is financially shrewd 🧠, right? He must be, he is one of the richest people on the planet. He said ‘the stock market is a device for transferring money from the impatient to the patient".
To all that are thinking of withdrawing their money – show patience!
Here is Warren talking about what we advocate (although we believe you should be globally diversified, Mr Buffett is biased to the US!)
It’s all very well me saying not to trust your feelings. But when Obi-Wan Kenobi from Star Wars says to trust your feelings, it’s hard to ignore him! That could make us think that our own feelings should help us make decisions over the thing that can make as many of our dreams as possible come true. That’s right; money.
The mendacious story our mind tells us is that we are best positioned to make decisions on our money. That may be because you have earned it or were good at making money. Or, it may be because it is SO important you feel only you can bear the responsibility.
But to whom did Obi-Wan trust his feelings? From whence did he learn this? That’s right, it was Yoda. Who was Yoda? He was a former financial adviser who unfortunately, due to some lay-offs of in-branch financial advisory staff due to increased regulatory pressures of the Empire, had to look at a new career, and so he got into coaching young padawans.
Yoda taught Obi-Wan to trust his feelings but also to recognise what they actually are. The disingenuous stories we tell ourselves of our all-seeing power, knowledge and skill we all know, deep down, are… BS! We know we are not scared of investment market volatility if it doesn’t stop us doing anything in the next 1-5 years. Instead, we are scared of not having as much for the rest of our lives. And that, in a properly diversified investment strategy, does not happen unless we make perfectly human and understandable mistakes of selling out at the wrong time or reacting to investment market commentary.
Luckily, for you, we aren’t able to control the (investment market) Force, but we do understand it. Trust me, trust us and let go of your feelings. We will be with you, always.
https://www.youtube.com/watch?v=o2we_B6hDrY (Indulge me, this is a long clip, but it’s a goodie so I put it all in 😉)
Statistics
For those of you who only understand hard statistical facts, I’ve got them in abundance! Contact me and I will provide…
Others are wary of statistics, believing Vic Reeves when he said:
“88.2% of statistics are made up on the spot”
So, without looking at numbers, let’s look at a definition and see if that makes you feel any better:
Reversion to the mean
‘Mean’ means ‘average’, and not just being mean, which is what using a karate chop on your little brother is. And ‘average’ in investing terms is actually very good and not the average we have come to know.
So, what does ‘reversion to the mean’ mean? Over time, a series of returns will settle down into an average. It may mean that you never see the mean return, let’s say 10%, in any of the actual years. For example, a 5-year set of returns, simply, of 5%, 20%, 7%, 13% and 5% = 10% a year in average.
Notice how the ‘average’ doesn’t actually appear in the sequence? This is the stock market, returning 10% a year on average but you will rarely witness that actual figure.
When the returns have been low, the return to the mean is coming… we don’t know when or how, but it is coming.
How can we help?
If you need help from a financial planner (and if you’re reading this, it’s likely you do), we are here to help you, guide you and be your Yoda, Obi-Wan, Bruce Lee, Ru Paul, Barbie… whatever you want / need us to be to help you understand and make the best decisions.
Whilst you are reading this, you are not doing what you could be, and that, my dear friend, will most likely be costing you money. Which ain’t very clever 🧠 is it?
We would be happy to help you on this so please contact us and we can do a full review of your finances to ensure you are in the best possible position. We don’t have much space for more clients at the moment, so contact us as soon as possible.
Interested in finding out more about investments – call us on 0121 705 1000, or email us at support@lucentfinancialplanning.co.uk saying: Give me Ubuntu! We will then send you a link to our social site, where you can find out more about investing and how Lucent help people. We think you’ll like it!
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