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Being A Long Term Investor in a Short Term World

Posted By Barry Ritholtz On October 11, 2013 @ 7:30 am In Investing,Philosophy,Psychology | Comments Disabled

time-warp [1]Its 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 [2] and this [3]). 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?

 


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[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2013/10/time-warp.jpg

[2] this: http://www.ritholtz.com/blog/2013/10/focus-on-what-really-matters/

[3] this: http://www.ritholtz.com/blog/2013/10/melt-up-government-shut-down-debt-ceiling-deal-edition/

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