I've been impressed recently on how similar successful long-term investing is to successful long-term weight management. Here are 5 things investors can learn from skinny folks.
1) Lifestyle Trumps All
Millions of dieters jump on the latest fad diet, lose a few pounds, and then ditch the diet only to see the weight return again and again. The local radio personalities seem to be a particularly egregious example (or are at least paid to appear to be.) At the end of the day, however, The First Law of Thermodynamics is still a pretty good theory. If you burn as many calories as you eat, you maintain your weight. If you burn fewer, you gain weight. If you burn more, you lose weight.
Just as with dieting, the most important part of being a successful investor is choosing an appropriate lifestyle. That means a lifestyle that allows you to save 15-20% of your gross income for retirement. It doesn't matter how good you are at picking investments, keeping costs down, or timing the market. If you can't fix the lifestyle issue, you'll never reach a comfortable retirement.
2) Thousands of Small Decisions
Successful weight management is the sum of thousands of decisions that are made every day. Do you take the elevator or the stairs? Do you cycle to work or drive the SUV? Oatmeal for breakfast or bacon and eggs? Cream and sugar on the coffee or black? Seconds? Desert? What snacks do you keep at your desk? The list goes on and on.
The successful investor has the same issue. Every day he is faced with opportunities to spend more than he makes. Not doing so is what provides the seeds his retirement tree will grow from. Likewise, each day the markets are open he is faced with the decision to stay the course, or succumb to Wall Street's marketing machine encouraging him to “upgrade” to the next new thing. Each month he has to decide where to invest his extra income. His investment success is determined by the sum of all these decisions.
This is why those who become rich overnight (lottery winners, and those who receive large inheritances) are often broke within just a few years. They never learned to make the little decisions correctly each day. The same choices that make you rich are the ones that keep you rich.
3) People Want a Pill, a Diet Program, or a Surgery
The weight loss industry does $61 Billion in business per year. That sum (plus the food the overweight shouldn't have eaten) could easily feed every starving person on the planet. Nobody wants to hear “you need to eat less food and exercise more.” They want weight loss pills, and special weight loss programs. At a certain point, many choose to have chunks of their stomach removed or their plumbing changed so they can continue to eat whatever they want and still lose weight. Their doctors justify it because the data shows that as bad as bariatric surgery is for you, it's better than having the ever-worsening diabetes, heart disease, and arthritis that you would have without it.
Investing is the same way. Nobody wants to hear they need to spend less money. Nobody wants to hear that they should invest in index funds and that their stocks are probably only going to return 7-9% a year and their bonds are only going to return 1-4% a year. Nobody wants to hear that the secrets to successful investing are holding costs down and staying the course with a reasonable investing plan.
They want to hear about how the Twitter IPO is going to make them rich. They want to hear about last year's hot mutual fund manager and how Joe's Hedge Fund made 57% last year (and surely will do the same this year.) Get rich quick schemes are no different from “lose 10 lbs a week” schemes. Neither one works in the long run.
4) Good Food Helps
The foodies among us are quick to point out that the situation is a little more complicated than the First Law of Thermodynamics would lead us to believe. That's probably true. Some foods are simply bad for you and your weight, and others are good for you. It's still possible to get very fat on squash and grass-fed beef, but the data is pretty clear that eating real food has some hormonal effects that help you maintain a healthy weight.
Eating real food instead of processed food is similar to investing in real investments, rather than processed investments, like whole life insurance, variable annuities, and hedge funds. Actually buying real companies, real pieces of property, and real loans from governments, companies, and individuals, is good for your investment plan.
If you save 20% of your gross income, you can probably arrive at a healthy retirement even if you decide to use some loaded mutual funds and whole life insurance to get there. However, you're much more likely to have a larger nest egg at retirement (and/or get there sooner) if you only eat good investments like low-cost index funds.
5) If You Want To Be Thin, Do What Thin People Do
Thin people don't think about losing weight. They don't think about diets either. They don't go running, or cycling, or to their soccer game because they want to lose weight. They do it because they enjoy it. They don't pass on that 3rd dessert because they're worried they'll get fat. They pass on it because “they don't need to eat 3 deserts” or “they're already full.” Thin people don't sit all day at their desk, then go home, eat a huge dinner, and plop down in front of the boob tube with a bag of bon-bons and a beer (or three.) They go for a run at lunch before eating a sandwich and an apple, coach baseball in the evening, and eat a healthy dinner with their kids at home afterward. On Saturday, after baseball, they go for a 30 miler with their cycling club. If you want to be thin, do what thin people do. If you want to be rich, do what rich people do.
Rich people don't spend money on things they don't value. Rich people talk about and learn about investing and other financial topics. Rich people work hard. Sometimes they sacrifice lifestyle for greater income. They're willing to prioritize their careers, and change jobs if needed. They choose careers they enjoy, but also careers that are likely to provide significant compensation for their time.
They plug holes in their budget quickly and adjust their lifestyle rapidly to any downward movements in their income. They're willing to sacrifice pleasure now for financial reward later. I find it interesting when people choose not to go to college (or choose a major connected to few lucrative opportunities), only work 25 hours a week, and refuse to move out of their hometown and then are surprised when they show up at their 20-year high school reunion and discover that they're the only ones who haven't “made it.”
Now don't get me wrong. I'm not saying poor people are poor because they don't work hard. I've met plenty of hard-working poor people. But it's very rare that I meet a wealthy person who hasn't put in some very long hours for many years to get where they're at. If my job only paid $10 an hour I'd be spending my evenings educating myself and my weekends looking for a new job (and probably working a second one.)
People don't get rich by buying whole life insurance, or picking stocks, or driving a Benz. They get rich by developing a profession or starting a successful business, taking some risks, budgeting carefully, and investing wisely. There's no point in having money just to have money and “getting rich” shouldn't be your life's focus since you truly can't take it with you when you go, but it's not rocket science to figure out how to have a financially successful life and a comfortable retirement. Just do what “rich people” do.
Neither managing your weight nor managing your finances is very fun. Automate the process whenever possible, and reap the rewards with a long, healthy, comfortable retirement.
What do you think? Comment below!
For food I have discipline once a week: at the grocery store. I make a list of what I need and stick to it. There are no cookies, chips, soda, etc on my grocery list. If I can have that discipline for the hour or less per week I’m at the grocery store then I don’t have any bad food in my house so I can’t eat any bad food. And I pack my own lunch – healthier and cheaper.
For investing I just put everything on automatic. I have discipline when I set up the accounts. Automatically deducted and invested in the TSP, Vanguard or money market account.
No I just need my shoulder to heal so I can go back to riding the bike to school, or at least the motorcycle.
Love the comparison. There are definitely many psychological similarities, and the industry around both feed on the same impulses.
I loved the article. Spot on. One of your best.
I basically agree with your article. But returns in the US stock market have been meagre since 2000. And based on present valuations, don’t expect much on an aftertax/aftercost/afterinflation basis in the next 10 years. As of June 2013, the Japanese stock market is down 58% IIRC from its 1989 peak after taking into account dividends and inflation.
My point is that your article assumes that investors will be rewarded for investing. I’m not as confident about that. I think it’s important to take into account how cheap or expensive are the securities that you buy. If that sounds like security selection or market timing, that’s fine with me.
But it’s the same principle that I use when I buy a house or a car or groceries. Virtually all noninvesting money that I spend, I take into account whether the price is appropriate for what I’m getting. A little work on my part doesn’t result in me getting the best deal, but it shields me from gross overpricing.
To illustrate the point, those invested in Japanese value stocks in 1989 have done well.
“I think it’s important to take into account how cheap or expensive are the securities that you buy. If that sounds like security selection or market timing, that’s fine with me.”
This is exactly security selection. Thinking that you are better at estimating the price of a security than the guys at Goldman Sachs or JP Morgan is a losing game. Overwhelming evidence suggests that stock picking will trail the most generic of Benchmarks (S&P 500). The whole point of investing in low-cost index funds is to match the benchmark because trying to beat it with stock picking is near-impossible for the average investor
The S&P500 PE10 reached a max of 44 in 1999. The Nikkei 225 PE10 was 90 in 1989. IOW, American and Japanese stock were expensive at those respective times. Results have been predictable since. Valuations matter.
The present PE10 of the US stock market is 24.89. The US stock market has had such a high PE10 since 1995, when Alan Greenspan talked about irrational exuberance; that ignores the recent bear market. Since 1881, the only other time that the PE10 has been this high was in the late 20s, and we know how that ended.
The PE10 in 1900 and 1966 came close to 24.89. Both times were followed by bear markets, with PE10s falling to less than 8.
One could make a case that the American stock market has been revalued, and that the present PE10 is what one should expect going forward. A survey done earlier this year found that the PE10 of the US stock market was the highest of 33 countries. That would suggest that the American stock market has not been revalued, and that the present PE10 is an aberration.
The peaks of 1920, 1929 and 1966 were followed by PE10 nadirs of 4.78, 5.56 and 6.64 respectively. For purposes of comparison, the recent bear market had a nadir PE10 in March 2009 of 13.32
I absolutely agree that valuations matter. If you buy something cheaper, you get a better return on it. That’s just math. The question is “Does changing your asset allocation in some manner based on current valuations lead to higher risk-adjusted returns in the long run?” Unfortunately, I have yet to see any evidence that this is a viable investing strategy. If valuations make it so obvious what you should do over the next year, 5 years, 10 years, or 20 years, please post what you should do so we can all follow along in real time. The reason it isn’t obvious is that your crystal ball is just as cloudy as mine. Just because valuations are high doesn’t mean stocks are going to stop any time soon. The investor is still faced with the decision of what to do (if anything) with his portfolio today.
http://online.wsj.com/news/articles/SB10001424052702304672404579185690889112758
“With the S&P 500 up 26.4% this year, including dividends, and foreign markets up 15%, now is an ideal time to see whether you have more exposure to stocks than you planned. Trim back to your target and keep at least some of the proceeds in cash.” Jason Zweig
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=126233&p=1851666#p1851666
“basically the message for almost all investors is to stay disciplined with your plan but make sure your plan is realistic in terms of assumed rates of return. If not you need to make adjustments. Either lower your goals or plan on working longer, or paradoxically you have to raise your equity allocation at time of high valuations and low expected returns. Another alternative would be to tilt more while keeping equity allocation the same.
Third, re REITS. This is tough one as is very slippery slope and if sell when do you get back in. But yes if it was me I would at very least lower my REIT allocation. In fact sold mine while ago based on valuations.” Larry Swedroe
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=126233&p=1851666#p1851666
“I agree with Larry that there are no bargains in the markets today. Everything from stocks to bonds to REITs are fully valued or close to it. So, what is an investor to do?
First, as Larry recommends, hunker down and stay the course.
Second, if the recent bull market in stocks and REITS has helped increase your portfolio to a point where you can coast into your retirement number, then reduce your risk.” Rick Ferri
I think that’s all great advice.
Great post and not just as a metaphor either. Good health is a form of investing. That basic gym membership keeps me sane and skinny. And the price of decent food pales in comparison to the cost of having heart disease and diabetes. It keeps that HSA a stealth IRA.
I disagree with the premise that rich people don’t get there by picking stock. However you invest, you are eventually picking stocks, whether directly or indirectly (a fund is a group of stocks, an index is a LARGE group of stock (very large)). When you buy stocks, you are picking them either in groups or individual allocation. The more research you do you will likely get better returns; but you are picking stocks. The more you know the better picks and returns you will make. Why is it that all the advice I read is “don’t know the individual stocks you choose! Always get someone else to pick them! No individual is better than the ‘insiders’ or professionals!” The average gains for any fund are rarely high percentages and, it seems the proprietary methods are rarely technical. Price action is the number one indicator of short term direction (less than one year holding time). Good earnings often lead to huge drops and technical analysis can indicate these drops and often the individual can’t take advantage of these or will be susceptible to negative moves because everyone wants to buy and hold forever. So, why shouldn’t all individual investors be well adept to making their own technical trades on individual stocks (or groups of stocks)? If they were, you wouldn’t see reports like http://www.medscape.com/viewarticle/824238_2 which say doctors can’t cover their bills because, among other things, they are vulnerable to unscrupulous financial management companies’ sales piches. As an individual investor, one should always be able to verify what is being pitched and, not understanding how markets work leaves an individual vulnerable to money hungry funds that primarily get their funding through fee collection rather than market returns. We should all be educated enough to at least agree or disagree that one investment method is a good idea or not. Advisors always have an inherent conflict of interest with their clients so, without being able to make good decisions (based on knowledge rather than hype), individuals will always be vulnerable. Don’t fear the markets; know them. Just my $0.02.
There is little to no evidence that investing on “technical factors” is a good idea.
I’ve often thought this, but there is a gap somewhere. I’m an excellent investor, I’m frugal and I saved for years and I’ve done quite well. And like you said, after years, it’s second nature. However, I just cannot lose 20lbs. Yes, I know, eat less, move more. Let’s just say it’s a good thing my stomach doesn’t growl at me every time I don’t buy something.