Time Preference

“You do not rise to the level of your goals. You fall to the level of your systems.” – James Clear

As we enter the third week of 2019…how have those New Year’s Resolutions worked out for you? This week is right around the time of year when gyms start getting “less packed” as the fair weather resolutioners start falling by the wayside.  You can finally get your sets in without worrying about a “bro” lurking nearby asking if he can “work in” with your set. Which might be one of my biggest pet peeves in the world which compelled me to set up my own home gym ten years ago. Now, new year or not, I never have to deal with that anymore. (Pro Tip: a home gym massively tilts the odds of sticking to your fitness resolutions for the New Year in your favor.  You can set one up too for cheap. Here’s how.)

But at the end of the day, whether it’s a new year or just another day in the office, self discipline is at the center of almost all success. Most people out there are not willing to do what it takes to stick to their resolutions, whatever they may be. Which is why so few are actually successful each year in achieving their goals. It’s because of self discipline — they simply don’t have enough of it.

Something as simple as eating food has nothing to do with your body, it has everything to do with your mind. To win in life you must gain command of your mind…to be able to choose actions that are in your long term best interest. It’s the great battle between wanting something now vs. building for the future. It’s YOLO vs. self discipline and of course if the world ends tomorrow, or you get hit by a bus, the YOLO crowd for sure wins.  But we can’t live our lives that way now can we? Back to the New Year’s Resolutions…

If “make more money investing” is anywhere on your list for this year (it usually always is on mine), then you’ll want to keep reading this post because there’s one major thing that most people get wrong about personal investing and that is time preference.

Time preference. What exactly does that mean? This is a concept we’ve spoken about before at length. Sometimes called the “Marshmallow Test”, there are numerous academic studies that have proven that people who choose to delay their gratification (have lower time preference) end up being more successful vs. people who prefer instant gratification (have higher time preference).

This concept should not be new to you. I’ve harped on about this before ad nauseum. And I’ve spoken equally as frequently (and annoyingly to some) about risk management. In the context of making money this year by investing, I’m sad to say that most people screw this one up.  

Warren Buffett famously said “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” but I like to take this one step further. Rule number 1…before you even think about investing…is to cover your bottom line. (Quick caveat here: Rule Number zero would be to have zero debt. By debt I mean credit card debt or high interest loans. Mortgages are generally okay as long as you know what you are doing…)

Now, what do I mean exactly by bottom line? I mean your running costs..the minimum amount of money that is needed to pay your bills, keep the lights on and put food on the table — your livelihood. Investing, as we all know by now, is all about psychology and an investor’s mind is a psychological battlefield.  The last thing you need to have weighing on the laundry list of cognitive biases is the fear of not being able to put food on the table for your family.

Have you ever asked yourself what would happen if you lose your job? Or even worse, if you (unexpectedly) actually do lose your job. It’s happened to me before, twice. Both times, unexpectedly. And both times I had nowhere nearly as much money saved up as I should have. Working for a paycheck is a funny thing. Money drips in so slowly yet goes out so quickly. There is no worse frame of mind than having to invest with a gun to your head to literally keep your lights on. Investing is difficult enough as it is…you certainly don’t need the added pressure of your livelihood on the line to top that off.

Don’t fall into the mentality of needing a “quick win” with some extra savings that you set aside next month or the other myth of having to “put my money to work ASAP”. Trust me on this one. I’ve been there, and I’ve barely survived that. Do whatever it takes to avoid this situation, because it will only end in tears. Save up at least a year’s worth of salary to cover your basic needs before you start looking to make investments so if you do end up sucking and losing it all (yes there is actually a very high chance of that happening) then you won’t be out on the street.

Once you’ve saved up a year’s worth of expenses to maintain your lifestyle, the real fun begins. You are officially ready to start investing. Remember, successful people in life have low time preference but every investor has at least a small part of them that desires to become a Master of the Universe. It’s part of the natural curiosity that drives us to the industry to begin with. It’s fun to use complicated language to try and fool people into believing you have more investing acumen than they do. But most people should simply plop their money into an index fund and sit back and enjoy stress free outperformance.

If you’re an equities guy, don’t try and be a hero and start whipping around bonds thinking you’ll be the next Jeff Gundlach. And if you are a highly skilled or trained professional that specializes in a non-financial field, don’t for one second believe that you can simply learn how to be a successful investor overnight. Most people lose money investing and that goes for both professionals (who do it full time for a living), and amateurs.

Understand your circle of competence even within the vast realm of financial markets and lean hard into that niche to begin your investing journey.  This year we are going to dive into some interesting topics in investing while also trying to navigate the guaranteed volatility that the markets will bring. In the meantime (and while you’re saving up a year’s worth of livelihood in the bank and furiously studying the markets) consider joining an investing group like the Explorer Partnership. Joining this group of likeminded investors is the perfect way for you to begin your investing education and have a little fun along the way.