Welcome to the first issue of the Family Wealth and Well-Being e-newsletter. This newsletter will be distributed 4-6 issues annually. Family Wealth and Well-Being will be a combination of my professional interest in investment and wealth management along with my personal passion in establishing and engaging in rewarding personal relationships with individuals who want to ensure that they live life to the fullest. There are tremendous amounts of negative information that we are constantly being asked to digest, this newsletter aims not be naively positive, rather only to be non-negative. We would like to stimulate your thought process to look at something potentially from a different perspective. One article will be investment related and the other will not.
In the 24 years I have been in this profession and with the relationships I have developed, one thing is for certain, money alone does not buy happiness. In fact, in some cases, it causes just the opposite effect. Now I’m not professing for a minute that this newsletter is going to be responsible for your happiness, as that responsibility I will leave to you. My goal is to bring engaging, concise and pertinent reading. I hope you enjoy.
The Irresistible Pull of Irrational Behaviour
I recently read “Sway, The Irresistible Pull of Irrational Behaviour” (By Ori Brafman and Rom Brafman). It was an intriguing look into why we do some of the things we do. Have you ever said to yourself, “Why in the world did I do that?” Of course we all have.
But why do we behave in ways contrary to our own self-interest? Why, when we place so much pride in our ability to be rational and prudent, do we at times behave with such irrationality? Why does a billionaire oil executive and commodities trader double down on trading losses again and again until all is lost? Why do NASA scientists ignore data that clearly shows O-rings fail? According to the Brafman brothers—as described in the book—we simply fall prey to one of a handful of “psychological forces that derail rational thinking.” The promise of the book is that, if we can become aware of them, we might be better able to avoid falling victim. Sway is filled with incredible stories about smart and successful people that, the Brafman brothers contend, fall victim to one of the “sways” with disastrous consequences.The following are a few sways that can derail rational thinking:
Diagnosis Bias: We make hasty judgments about people and things based on limited, subjective information, and then holding too tightly to our judgments (though they were formed from weak and/or incomplete data), accepting only information that conforms to our established views. Diagnosis bias is powerful and prevents evaluating new information objectively.
When we label people; they tend to take on the characteristics of our “diagnosis” (the chameleon effect). The solution is to be open to new facts and ideas.
Commitment Bias: Irrational loyalty to an old strategy that was previously successful (staying the course) is not in our best interest. Some catastrophic airplane crashes have been the result of pilots’ commitment bias. They focus on on-time arrivals and departures, ignoring warning signs and safety factors. Businesses fall prey to confirmation bias too. But they need to step back from projects and ask, “If I were just arriving on the scene and reviewed the facts, is this solution the rational one?”
Loss Aversion: We go to great lengths to avoid loss. Sometimes our desire to avoid loss causes us to act irrationally. Loss aversion combined with commitment bias is a powerful force that has led many to their financial grave. It’s the investor who panics and focuses on short term volatility, sensationalized news reports and ignores prudent long term investment principles and sells for a loss. It’s the gambler who keeps doubling down to catch up. The solution is to focus on long-term goals.
Group Conformity: We like conformity. When a group reaches consensus, members of the group feel pressure to “go along to get along.” This can lead to irrational behaviour such as groupthink. The good news is that a single dissenter can help the group break out of groupthink and make more rational decisions.
In the end it is always wise to self-reflect when you are making a major decision. Determine whether any bias is “swaying” your thinking and if so ask yourself, without this bias would my decision be prudent and rational. The answer sometimes may surprise even you.
“To become an effective leader on the playing field of life, you cannot be a generalist trying to be all things to all people. Specialists win. Focus on your best talents on your biggest opportunities. Happiness is when what you think, what you say and what you do are in harmony” – Mahatma Gandhi
In this section of our newsletter, we’ve decided to focus on current events and phenomena that are important to you, your life, and your money. Hopefully you can realize some value in your own financial lives by reading this column.
With this in mind, nothing is more prominent right now than the remnants of the colossal disaster in Japan. On March 11, 2011 Japan was struck with one of the most significant natural disasters of the 21st century. The earthquake that shook the worlds’ third largest economy to its core was measured at 8.9 on the Richter scale. To put that into perspective, the largest earthquake ever measure was in Chile in 1960 which measured 9.5 on the Richter scale. If that wasn’t bad enough, the earthquake was followed by a giant tsunami that ruined much of the coastal area in Japan including the capital city of Tokyo. This in turn caused several nuclear explosions from nearby power plants, effectively increasing uncertainty around a global nuclear disaster. Japanese officials have been trying to stabilize the situation ever since. At the time of writing this article, they are nowhere near having it fully under control.
The effects of the devastation in Japan are going far beyond its borders. The ripples have had far-reaching effects impacting citizens worldwide. There have even been a couple of local examples. The Toyota plant in Woodstock and the CAMI plant in Ingersoll have been impacted substantially. The parts supplied from Japan have been cut down, thereby forcing a slow down in production in Ontario. Overtime has largely been taken off the table in these plants and some employees are even worried aboutgetting laid off. Not only does this type of disaster have a physical effect, it also has a psychological effect. The world today is integrated and globalized like never before. The internet has allowed us to gather information from all over the world with a simple touch of a button.
This worldwide phenomenon has implications, both good and bad, for us as investors. This means that factors beyond our control in other parts of the world will have an impact on our portfolios and, in turn, our lives.
For example, the Nikkei index in Japan fell 19% in 3 days from March 13th to the 15th. 1 Sounds pretty bad, right? But, what does this mean for Canadian investors? Most prudent investors hold highly diversified portfolios with exposure to many economies in the world including Japan. An average portfolio made up of 30% fixed income and 70% equities was down approximately 1.5%. Not so bad.
The benefits of diversification are more relevant now than ever before. Information from markets and economies around the world is being reflected in stock prices at an extremely fast pace. So fast in fact, that it is almost impossible to make a trade and generate a profit from news that is transmitted to the internet, magazines, and newspaper articles. So, with all of these changes and innovation going on in the world, how can an investor gain an edge? What can we do to improve the performance of our portfolios? It’s simple. Stick to basic, tried and true investment principles. Diversify your portfolio, do not sell on emotion, invest for the long term, keep your costs down, evaluate your risk tolerance on a regular basis, and get a coach that can help you stay on course. You see, the good news is you don’t have to do anything new or exciting to be a successful investor. In fact the opposite is often true. A boring, dull investor will usually outperform the exciting one over the long term. Warren Buffet explained this principle very well in a past interview saying, “Investing is simple, but not easy.”