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Mammoth Mistake

David Johnson

NEAR THE END OF 2019, just before a couple of coworkers and I headed out for lunch together, I said to them, “I’m 26% smarter than I was at the beginning of the year.”

“What are you babbling about now, Johnson?” one of them said.

“The mutual funds where I have my investments went up by 26% this year,” I said. “Clearly, I’m 26% smarter now than I was at the beginning of the year.”

“Guess you’re buying lunch then,” he said.

“D’oh.”

You’ve probably noticed there were a couple of difficulties with my theory. First, in 2019, a 26% return lagged behind the S&P 500 slightly, so being “26% smarter” wasn’t much of an accomplishment. Second, all joking aside, there are absurd logical flaws in thinking you’re smarter simply because you had a good investment year. Still, I find it a surprisingly seductive fallacy.

A parallel fallacy operates in reverse in down market years, such as 2022. When you lose 20%, it’s normal to ask yourself what you’re doing wrong. I think that impulse, however, is the psychological jumping off point for some classic investment errors, including selling out at a market bottom.

Ask yourself: What did you do wrong? If you had a reasonable plan in place before the market downturn, the right answer is probably “nothing.” The most important thing about realizing you did nothing wrong is that it means you don’t have to take drastic action to fix your mistake—because there’s no mistake to fix.

Sometimes, not doing anything is difficult. When faced with a problem, there’s a natural, and perhaps deeply ingrained, impulse to do something right now. Presumably, a bunch of Cro-Magnon hunters weren’t very successful if they stabbed a mammoth once, and then held a series of meetings to decide whether they should undertake a study to determine whether they should stab the now highly irritated mammoth again. Instead, successful mammoth hunters stabbed it again right now.

Evolution favored those who took action and it imposed penalties on those who scheduled lots of meetings. While we can fervently hope that evolution will eventually eliminate people who like to schedule lots of meetings, that doesn’t mean that contemporary financial markets favor people who frantically take abrupt action in response to short-term changes in market prices. After all, it’s a market, not a mammoth.

Personally, I’m not prone to worry much about stock and bond market downturns, even though they look alarming. Eventually, I figure, the market will go back up without me having to do anything.

On the other hand, I am prone to think I’m smart when my investments perform well. After all, in that case, I did take action: I saved money, I invested it and the investments went up. Looks like I’m pretty smart. Lately, though, I’ve begun to suspect that certain outcomes had as much to do with luck as any intelligence I might have.

Case in point: My peak earning years were 1996 to 2021. The late 1990s were a good time to start investing in the stock market because returns were encouraging. Even the subsequent market downturn around 2000 wasn’t a bad deal for me because by then I realized I should be buying stocks, not selling them—and lower prices meant I could buy more shares.

It was as if I had $20 and headed to the store to buy some steak, but before I got there the price of steak fell by 40%. Steak still looked good to me, but now I could buy almost twice as much with my $20.

By some measures, the stock market took a decade to recover from the 2000-02 decline, its rebound interrupted by the housing crisis and recession at the end of that decade. All the while, I was buying inexpensive shares while my salary, and hence the amount I could save and invest, increased over the course of my career. Then, over the following 10 or 11 years, after I had already built a decent-size portfolio, the stock market did remarkably well.

That sequence was completely outside any intelligent action on my part. I could have saved the same amount and invested the same amount but, under other historical conditions with different return sequences, I wouldn’t have fared nearly so well.

Why is it important to realize that my efforts were only part of the reason things went well for me? This realization might prevent me from thinking I’m so smart that all my ideas are pure genius and that I should act on them right now.

In other words, those of us who manage our money tend to focus on external risks—market risk, interest rate risk and so forth. Yet many of these risks are outside our control. At the same time, we don’t spend much of our energy considering an equally dangerous risk that is under our control: management risk. That’s the risk that the guy managing your money—you—will make unforced and completely avoidable errors.

In most personal finance decisions, from purchasing objects to changing investment strategies, you don’t have to act immediately. Before you bet your life savings on your latest idea, you have plenty of time to think about whether there’s anything wrong with it. I try to spend more time thinking about the ways a new idea might be wrong, and less time thinking about what a good idea it is.

The real intelligence in a financial plan is to understand your goals, the means you have to achieve those goals over time, and to diversify your savings and investments in such a way that your portfolio supports what you want to do, while avoiding outrageous exposure to risk. A good financial plan contemplates periodic, normal-but-painful market downturns, so that such things don’t derail your long-term goals.

The temptation is to think choosing the “right” stock or mutual fund is how smart people do well. But I think the smart people are more likely to spend their time developing a plan that’s likely to work, and then sticking to it. That’s less sexy than “hitting it out of the park” with a stock pick, but far more likely to work, and it helps you avoid worrying about any need to take drastic action right now.

I could get in real trouble if I immediately acted on all the ideas that pop into my head.

If those of you with spouses read that last sentence aloud to your better half, you might be met with a disturbingly enthusiastic confirmation that this notion applies to you, too.

David Johnson retired in 2021 from editing hunting and fishing magazines. He spends his time reading, cooking, gardening, fishing, freelancing and hanging out with his family in Oregon. Check out David’s earlier articles.

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