Morgan Housel, renowned author said that reasonable decisions could produce better results than rational decisions.
The author of The Psychology of Money spoke about the investors’ behavioral aspects and the need for realistic optimism at the Cafemutual Ideas Fest 2021.
Further, he enunciated the difference between getting rich and staying rich. Getting rich requires being an optimist and taking some risk. But staying rich involves the contrary i.e. paranoia about the short term with a degree of conservatism.
Being able to decode the client’s sentiments around money and investments will help MFDs/advisors to connect better and guide them effectively.
Here are the key highlights of Morgan Housel’s session at CIF 2021:
- Risk is what you do not see - How risky something is, depends on whether you are prepared for it. The biggest economic risk is what no one’s talking about because if no one’s talking about no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives. A better way to deal with risk is being prepared for it to happen at any moment.
- Timing is meaningless; Time is everything - Investors usually underestimate the time needed to put the odds of long-term success in their favor. Long-term could be described as every holding period that finishes with a positive return and is much longer than what investors tend to think. They must increase the holding period for improving the investing return. After all, as Charlie Munger once rightly said, ‘the first rule of compounding is never interrupt it unnecessarily.’
- You could be wrong half the time and still do great - Good investing is not about making great decisions. It’s about consistently not making mistakes. A regular reaction to the developments in the short run can move you away from the investment strategies, which are likely to earn the highest return.
- Create an investment strategy around behavioral aspects - You have no control over how the markets or the economy will move next. The only control that you have in investing, is your behavior. The best indication of future behavior is your past behavior. Go back and analyze how did you react to certain situations in the past, and create an investment strategy around these former responses. This gives you the comfort to stay invested longer.
- Reasonable decisions can produce better results than rational decisions. - There cannot be one right investing strategy. Financial goals and risk tolerance vary from individual to individual. Thus, what may otherwise seem to be rational may not work in a particular situation. The most suitable investment strategy is the one that is capable of meeting the desired financial objectives
To recreate this experience, you can access the recorded version by clicking here.
