As much as we want to act rationally, our investment decisions are unfortunately impacted by our behavioral biases.
In other words, our brains are working against us.
Veteran market strategists Jeff Saut and Richard Russell note that the biases of wealthy investors differ from the biases of not-so-wealthy investors. And this helps the rich get richer and while the poor get poorer.
Specifically, the wealthy have the advantage of not needing more money. Whereas the little guy not only needs it, but he needs it fast.
Saut, the chief strategist at Raymond James, recently cited this passage from Russell's recent investment newsletter. First, here's Russell on the wealthy (emphasis added):
In the investment world wealthy investors have one major advantage over the little guy, the stock market amateur and the neophyte speculator. The advantage wealthy investors possess is they DON’T NEED THE MARKETS. I can’t begin to tell you what a huge difference that makes, both in one’s mental attitude and in the actual handling of one’s account. The wealthy investor doesn’t need the market because he already has all the income he needs. He has money coming in via bonds, T-bills, money market funds, real estate, and stocks. In other words, the wealthy investor never feels pressured to ‘make money’ in the market.
The wealthy investor tends to be an expert on values. When bonds are cheap and bond yields are irresistibly high, he buys bonds. When stocks are on the bargain table and stock yields are attractive, he buys stocks. When real estate is a great value, he buys real estate. When great art or fine jewelry is on the ‘giveaway table,’ he buys them. In other words, the wealthy investor puts his money where the values are. And if there are no outstanding values, the wealthy investor waits. He can afford to wait. He has money coming in daily, weekly, monthly. In other words, he doesn’t need the market. He knows what he is looking for, and he doesn’t mind waiting weeks, months or years (they call it patience).
Here's Russell on the not-so-wealthy:
What about the little guy? This fellow always feels pressured to ‘make money’, to ‘force the market to do something for him.’ When this fellow isn’t buying stocks at 3% yields, he’s off to Vegas or Atlantic City trying to win at craps or he’s spending ten bucks a week on lottery tickets or he’s ‘investing’ in some crackpot real estate scheme with an outfit that his bowling buddy told him about. And because the little guy is forcing the market to do something for him, he’s a consistent and constant loser. The little guy doesn’t understand values so he always overpays. He loves to gamble, so he always has the odds against him. He doesn’t understand compounding and he doesn’t understand money. He’s the typical American and he’s perpetually in debt.
The little guy is in hock and he’s always sweating, sweating to make payments on his house, his refrigerator, his car or his lawnmower. He’s impatient, and he constantly feels pressured. He tells himself he has to make money fast. And he dreams of ‘big bucks’. In the end the little guy wastes his money on the market, he loses his money on gambling, and he dribbles it away on senseless schemes. In brief, this ‘money-nerd’ spends his life running up the down-escalator. Now here’s the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than his income, if he had taken that extra income and compounded it in safe, income-producing securities – in due time he’d have money coming in daily, weekly, and monthly – just like the rich guy. Then in due time he’d start acting and thinking like the rich guy. In short, the little guy would become a financial winner instead of a loser.
Russell's characterization of the "little guy" may seem unfair. Not all of us are drowning in debt. But dreams of bigger bucks fast seems pretty close to universal.
Saut extends Russell's discussion by beautifully articulating the madness of markets and investing:
In the world we live in, few look at risk. Most only look at reward. The few who do look at risk (the educated, the street savvy) make their money at the expense of the great unwashed majority who swallow the noise nonsense about getting rich quick. Investing is a get rich slowly process. You have to put your money at risk in the face of uncertainty. Emotions run rampant before the uncertainty of floating, fluctuating, often violent and volatile markets. Constantly discounting prices are fickle and full of surprises. Disorder is usually the norm.
Some stuff to remember as you make your next investment decision.
This is a repost of an article that appeared on Business Insider on February 11, 2014
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