time-warpIts Friday, and today is the day I usually like to wax philosophical about a variety of things. It seems this week we have done a good deal of that already (see this and this). Given those posts, let’s briefly discuss the issues investors have with the artificial construct we call Time.

What’s that you say? You believe Time is real?!

It sort of isn’t. We can attempt to define it as a 4th dimension (after 3 dimensional space: X, Y & Z). We can claim it is a measure of duration, or merely an illusion as perceived by mankind. For example, the International System of Units (SI) has defined one second as “the duration of 9192631770 cycles of radiation corresponding to the transition between two energy levels of the caesium-133 atom.”

Sure it is.

Rather than getting too lost in the weeds, lets discuss what Time means to investors.

Humans experience Time in the here & now — the intersection of what our faulty memories recall of the past, and what our optimistic expectations and hopes are for the future. Consciousness brings with it an awareness of the current moment, with the past providing a form of context and the future creating a possible path.

But human Time awareness is fraught with all manners of bias and cognitive perception errors. Given how you humans experience Time, your general mindfulness of all that is going on around you, there exists a heavy bias to the Church of What Is Happening Now. I call it the Recency Effect, but there are lots of other names for this phenomena.

Hence, your tendency to put excess emphasis on short term noise. The focus on the most recent data point in a series over the longer term trend. Minute slices of news matters much more than does the big picture. There is a preference for action over patience, an inability to do, well, nothing (Don’t just do something, sit there).

Investing is really about imagining your future self  — when you are older, working less or not at all, earning much less money. Paying for your retirement or your kids (or latter generations) educations. What the future you will have in terms of assets.

The ability to think far into the future — years and decades — is not something that comes easy. But it is essential in order to be a successful investor.

Before making your next investing move or trade, ask yourself this question: How will this change look to future me 20 years hence?

 

Category: Investing, Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Being A Long Term Investor in a Short Term World”

  1. rd says:

    This is why teaching science, mathematics, and history well is so important. If you have a solid grounding in those, then you start to see the big picture on long time frames. That assists greatly in putting the constant sound and fury into context of the bigger cycles of your own life and civilization. At that point, decade long investing periods actually start to look short.

  2. markwyand says:

    i can’t help but think of one of my favorite lessons from the great carl sagan – the fourth dimension. thanks for a great conference, barry.

    http://www.youtube.com/watch?v=UnURElCzGc0

  3. Capitalist Canuck says:

    “Humans experience Time in the here & now…Consciousness brings with it an awareness of the current moment…”

    This would be great if it actually happened.
    Thing is, according to Buddhism (the Science of the Mind), it’s the rare person who actually experiences the “here & now” — consciousness — instead, their brain either wallows in the past or fritters away in the future. Probably both bad for decision making.

    Even actual scientific studies have shown that people most unhappy with their jobs are so because they are always thinking of something other than the “here & now” (ie. they are focused on what they would rather be doing than what they are actually doing).

    One could do worse on a Friday than dig out some ol’ Pink Floyd vinyl…Time AND Money!

  4. couragesd says:

    I was thinking about this the other day. What is it that makes humans focus on the extremes of the range when they might be better off focusing on the mean, or even the mode for god’s sakes. Are we all that remarkable? really? that we always identify with the outliers.

    Math is well known, it is just poorly applied.

  5. RW says:

    I had a nasty habit of ‘fiddling’ with my portfolio and it cost me ROI until I read Harry Browne back in 1989 and realized I could have a ‘permanent’ portfolio w/ appropriate asset allocations and algorithmically guided periodic rebalancing and a separate ‘speculative’ portfolio for ‘fiddling’ AKA trading.

    The fixed rule of course being that there could be no transactions between the two portfolios.

    I eventually developed a more complex global allocation scheme than Browne’s model but the basic principles stayed pretty much the same for the permanent portfolio and it has grown well for 20 years now. Got good enough at trading that I stopped losing money in the speculative portfolio and it adds some alpha now so (eventually) a win-win; didn’t always come easy, or cheap, but that is often the nature of an education. YMMD

  6. constantnormal says:

    If you can imagine what the “future you” is like, 20 years hence, you are a remarkable individual indeed.

    But that in no way diminishes the value of trying.

    My guess is that at least some of the really bone-headed moves we all make from time to time might be seen for what they are, and offer the opportunity to avoid them. Certainly questions will be raised, which is always a Good Thing.

  7. [...] Barry Ritholtz, “Investing is really about imagining your future self  — when you are older, working less or not at all, earning much less money. The ability to think far into the future — years and decades — is not something that comes easy. But it is essential in order to be a successful investor.”  (Big Picture) [...]

  8. [...] Being A Long Term Investor in a Short Term World | The Big Picture [...]

  9. san_fran_sam says:

    “…the International System of Units (SI) has defined one second as “the duration of 9192631770 cycles of radiation corresponding to the transition between two energy levels of the caesium-133 atom.”

    Isn’t this also about the same rate as high frequency trades occur?

  10. [...] Barry on being a long-term investor in a short-term world.  (TBP) [...]

  11. sethgodin.typepad.com/seths_blog/2013/10/time-doesnt-exist.html Time doesn’t exist until we invent it