November 21, 2022
3 things I’m thinking about this week…
1 – Foolish Consistency. Robert Cialdini’s classic Influence: The Psychology of Persuasion talks about the Consistency tendency. It’s the tendency to automatically act in a way that is consistent with prior actions. And the actions can be small, but they still trigger the response.
Driving to work the other day, I saw this car ahead of me. Just by adding this license plate frame, it is more difficult for this driver to say he or she is not “completely satisfied” with Irvine Toyota.
Consistency is valued in relationships and clearly it’s a good characteristic most of the time. But in making decisions in situations where the facts can change, it’s good to be aware of it and the way it can box us in.
2 - FTX: Investing vs. Speculating. Much has been said about the rapid collapse of FTX. What comes to mind: confusion between speculation and investment. See this quote from Ben Graham below. “Safety of principal” stands out, doesn’t it? Speculation is not wrong, per se, but it’s incapable of sustaining your investment plan.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
― Benjamin Graham, The Intelligent Investor
Many of us have an investment mindset when it comes to home ownership, which is good. Overlaying a speculative mindset here highlights the lunacy – would you buy a home for a few weeks and sell it because it went up 5%? Would you put your life savings into a home on a shaky foundation, in a bad neighborhood?
This also brings up the endless appeal of novelty in investing. People have asked us over the last year about our view on cryptocurrencies and whether or not we should be investing in them. My experience suggests that when we get questions like this, it is indicative of future investment trouble not opportunity.
So why do investors (I’ll use the term loosely here) crave novelty? Might be tied to the other eternal investor wish: finding a shortcut to the top. Who wants to wait for compounding to do its magic? And, of course, this time might be different!
3 – A Little More About Compounding. A lot of people talk about a hot investment they’ve made. Or a great couple of days of investment performance. Or how they’re doing year to date. Selectively, I should point out. Few trumpet the average performer in their portfolio, or “the duds.” This can lead to a mindset and focus of performing well…quickly. Like, this year. Or, this month!
But what really works for wealth building? The power of compounding. We know compounding is much better over long periods of time. Our minds have trouble with the scale of compounding – even modest returns year after year make a big difference. Find a way to keep it going in your life.
“But good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated. It's about earning pretty good returns that you can stick with, and which can be repeated for the longest period of time. That's when compounding runs wild.”
-Morgan Housel
…and one more thing
Sports facility naming deals don’t always bode well for their sponsors. Enron Field (Houston Astros 2000-2002), CMGI Field (New England Patriots 1999-2002), FTX Arena (Miami 2021-2022 – they are terminating their deal as we speak) and Adelphia Coliseum (Tennessee Titans 1999-2002) are all examples. Here in Southern California, we have Crypto.com Arena (LA Lakers, Clippers, Kings 2021-?)…as you can see below the paint isn’t even dry on the sign. It makes me think: are they next?
-Dave
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