Be a Long-Term Investor in Life
After 50-plus years in finance, I’ve come to believe that the same habits that make a good investor make for a good life.
Start with seeing the opportunity in uncertainty. In investing, returns provide compensation for taking on the financial risks of uncertainty. Risk and reward are directly related. In many ways, the same is true outside the market. We move to a new city, change jobs, get married, and we don’t know how any of it will turn out. That can create anxiety and opportunity. My parents understood this.
When I was a kid, we lived in Garnett, Kansas, population 3,000. Dad worked for The Kansas City Star, and Mom was a schoolteacher. They wanted their three kids to go to college, but they didn’t have much money. So, they picked up stakes and moved the family 50 miles to Lawrence, home of the University of Kansas. It was a much bigger city where they didn’t know anyone, but where we could live at home and take classes at KU for $116 a semester. They had no idea how the move would turn out. That one decision set the stage for everything that came after. So thank goodness for seeing the opportunity in uncertainty.
Here are some more principles that work not only in investing, but also in life:
1. Flexibility adds value.
Think of some people who persevered through hard times. They probably weren’t rigid. Flexibility allows for adaptation. Your core values should stay put, but the way you live them out will shift over decades, and that’s OK.
2. It’s better to plan than to predict.
None of us has a crystal ball. We apply to a number of colleges, not just our first choice. We wear a life jacket on a boat even though we know how to swim. Same with investing. We make plans that account for a wide range of outcomes with the goal of being comfortable with our decision no matter what happens in the markets and in our lives.
3. Control what you can control, and manage the rest.
You can’t control the stock market. You can’t control interest rates. You can’t control what a 2-year-old does five minutes before naptime. Anyone who thinks they’re in charge of everything is in for a surprise. Some things you can control in investing are: how much you save, how you behave, what you pay in costs, and how you respond when things go wrong. Get those right and the rest gets easier to live with.
4. Harness the power of compounding.
Most people associate the idea of compound growth with money, but our lives are also the result of compounding. Decisions—both good and bad—build upon each other. When I was a graduate student at the University of Chicago, I decided I didn’t actually want to be a professor—I wanted to put the ideas I’d learned into practice instead. But I wanted to keep working with my professors and fellow students because I knew them and how much they had to offer the world. I ended up starting a company with people I’d met at Chicago, and 45 years later I’m still working with some of them. That one decision kept compounding over time. I even got to watch my professor Gene Fama, whom I had the honor of serving as a research assistant, become a Nobel laureate. That was not on my bingo card.
The life version of compound interest is wisdom. You learn from what happens. You make a slightly better decision next time. Over enough years, it all adds up.
Both life and markets are shaped by chance, so no matter how good your decisions are, there’s no guarantee of a perfect outcome. Outcomes matter, of course, but they’re not always completely within our control. Judge yourself by the quality of your decisions instead. If you’ve controlled everything you could control with a strong sense of personal responsibility, you’ve done your job. Things shake out how they shake out. Don’t ruin a good night’s sleep by second-guessing yourself.
That’s all anyone really can do. But it turns out, that’s still a lot!
Stay calm, stay invested, and let markets work for you.
David