Same As Ever

First is his discussion about time horizon. Housel’s key message is that investors talk about being focused on the long term, but they rarely behave that way. “Long term is harder than most people imagine, which is why it’s more lucrative than many people assume.”⁽¹⁾ Most people think that just by saying they are long-term thinkers they can somehow by-pass or avoid the painful and stressful events that populate the short term. That is not how it works. True long-term thinkers and actors experience all the pain and suffering that everyone else does. What sets them apart is having the discipline to stare into the abyss but maintain their commitment to long-term thinking – to not blink when the world seems to be coming to an end, or they are woefully out of step with current market dynamics. Most human beings – indeed, most investors – are simply unable to do this.

Housel points out that there is a distinction between patience and stubbornness. Things do change in society and the economy, and an investor needs to appreciate occasionally that they may be wrong, or what once was true no longer is. But, as Housel’s book title suggests, some things, like the human desire to react to fear or uncertainty, never change. Unusual patience is needed to truly achieve the benefits that the “long term” has to offer.

Housel has sympathy for most investment managers who claim to be long-term thinkers but don’t act that way. The fact is that they have a business to run. As committed as the manager may be to the long term, they must convince their clients to think that way too. “Don’t worry that we are down 30%, we are here for the long run!” If the clients don’t buy into it, it is cold comfort to the manager who turns out to be right if the clients have all left.

This point resonates deeply with me. In the early days of Nexus, we confronted the trauma of the 1999/2000 technology bubble. I say “trauma” because we largely sat on the sidelines while technology stocks soared. One stock, Nortel Networks, expanded to comprise 35% of the market capitalization of the Canadian stock market. According to our analysis at the time, even using excessively optimistic assumptions, Nortel’s stock price was significantly higher than what it was worth. When it was ultimately spun out of our long-time holding of BCE, we sold it. We got rid of the thing that most clients thought was the crown jewel.

In February 2000 (having survived the other trauma of Y2K), I vividly recall sitting at a table with colleagues talking about how certain we were that we were right to avoid the technology bubble, but we had no idea if our business would survive long enough to be proven right. That same month, one of my partners was pulled aside at a party by a friend who expressed grave concern that he was ruining his career by missing out on the new thing. The world had changed. It was different this time. Thank goodness we didn’t blink, the way most investors did. Clients were well rewarded for our patience.

The second message is conveyed very eloquently by Housel in the introduction to the following chapter: “Let’s discuss an enduring quirk of human behavior: the allure of complexity…” ⁽²⁾ Throughout modern human history we have been lured into believing that something that is complex must be “better” than something that is simple. Complexity gives the impression of control over a situation. If a person says something about a topic that another does not understand, it creates the impression of intellectual superiority, a feeling of admiration, and a tendency to accept the statement at face value. Complexity sells!

Often, a simple explanation or perspective is more effective. Nature has figured this out. Housel points out that animals with hundreds of teeth evolved to have a handful of specialized ones such as incisors, canines, and molars. Skulls that were previously made of hundreds of tiny little bones evolved into protective helmets with fewer than thirty. The process of evolution eliminated the extraneous items and focused in on the few that mattered. ⁽³⁾

Think of investing. There are only a few things one needs to know: spend less than you earn, invest the balance in something simple and sensible, and be patient. Instead, our industry thrives on complexity – derivatives, extra-leveraged ETFs, and countless other securities that are often of greater benefit to the creator than the investor. Why is it that the average return earned by equity investors is substantially lower than the returns generated by market indexes? ⁽⁴⁾ A bewildering buffet of choice and effective marketing campaigns cause most investors’ animal spirits to trick them into buying high and selling low.

Warren Buffett famously observed that “investing is simple, but not easy.” Bernard Baruch remarked that “The main purpose of the stock market is to make fools of as many men as possible.” Housel’s observations on complexity make sense in the context of these timeless comments. Investing is not easy. Every investor makes lots of mistakes. If I make a mistake on something mysteriously complex, perhaps that is more forgivable than if I make a mistake on something simple?

Same as Ever is thoroughly readable and contains many other insights that Housel presents with the entertaining skill of a good storyteller. We recommend it (and we aren’t getting a commission).