Human Nature: Where Weather Meets Investing
Photo - The Miller Family (from left to right): Ava, Melissa, Jim, Mason & Liza
We recently returned from our family spring break trip to Puerto Rico. It was a wonderful week spent with good friends of ours (two families – ten people – one house!) exploring a part of the world our crew had never visited before. We met lots of delightful people, ate delicious local cuisine, and took in a plethora of beautiful beaches and countryside.
While the week was fantastic, it wasn’t without its moments of anxiety, particularly as we landed and were met with a 7-day weather forecast sporting something like a 40-80% chance of rain each day! While the other three adults in the house started to strategize about the weather, my mind quickly hopped to its parallel with investing. Island weather is unpredictable at best, but when it’s a tropical island in the spring, it’s truly a crapshoot. So, as I listened to everyone I silently gave each of us a nickname. Real names have been changed to protect the guilty….
“Stormy” (aka Technical Analysis man) – the patriarch of the family we traveled with loves to track weather patterns and attempt to glean information from them. He’d say things like, “The wind has been out of the southwest each morning so we should be fine once it breaks around noon, which will push the clouds off towards the north and calm the ocean tide. The best beach time looks to be in the 12:00-3:00pm window. That’s going to continue for the next couple days and then the pattern is shifting.” That prediction would be fine if patterns were always predictable and guaranteed; the same goes for weather and stock markets.
“Cloudy” (aka Market Timer woman) – the matriarch of their family is a little more willing to bounce around in hopes of always being in the perfect weather place. She’d conjure ideas like, “There is less chance of rain in the morning at Beach A, less in the midday at Beach B, and less in the afternoon at Beach C. So, let’s go to Beach A from 10:00am-noon, Beach B from noon-2:30pm, and Beach C from 2:30pm-4:30pm.” This may seem reasonable, but what about the transaction costs involved, such as travel time between locations, the cost of gas, and lost time loading and unloading ten beach chairs and towels? And that’s just the guaranteed losses: what if the weather prediction part is also wrong? Similarly, we can aim for the perfect investments at every moment in time based on ideal predictions, but, even if our predictions could be consistently right (they can’t), the transaction costs and taxes of constantly changing investments will eat away the earnings.
“Overcast” (aka Forecast woman) – my bride loves the weather channel app and was glued to it from the time our plane landed. She’d exclaim: “They are saying we’ll have clouds and over 50% chance of rain basically every day. We aren’t going to see much sun, and we came all the way here for a tropical vacation!” I’d liken the all-knowing forecast to an economist’s prediction. Someone publicly assigns a likelihood to a future state. But meteorologists and economists are rarely held accountable when their predictions are wrong, as they often are. So why would we blindly base our daily activities (or retirement funds) on them?
“Spring” (aka Fundamentals man) – Okay, so this is me. My spring break outlook became: “Alright, we’re here and the weather is going to be what it is going to be. I can worry about it and spend a lot of energy trying to strategize about it, but it’s going to be what it is. We’re on a tropical island that traditionally has temps in the low 80’s in March, sunshine most of the day, frequent rain showers in the late afternoon, and a similar pattern daily. Let’s develop a sound plan (i.e., pick what looks to be the worst weather day and plan some non-beach activities and set aside the days that are supposed to be the nicest for activities that need sun). Let’s monitor this game plan as time goes by (i.e., check the radar) and course correct if needed (i.e., not put our head in the sand – pun intended).”
It's human nature to want to avoid all the “bad” (weather in this case but markets in others) and experience only the good. But life doesn’t work that way. The effort to attempt to avoid bad isn’t worth the cost, and it can’t consistently be avoided anyway. It’s more prudent to set a plan that is reasonable for your circumstances and course correct as new information arrives. That makes for a great trip, and a wonderfully enjoyable retirement.