22 Mar 2013 Mr. Spock and Homer Simpson
One of the most challenging issues we face as investors is the temptation to change, or worse, abandon our carefully reasoned investment plans for perceived threats or opportunities. In these instances we wonder whether we should apply the brakes or step on the accelerator. It seems only as a last resort do we consider sticking with our carefully laid-out investment plan, ignoring the temptations of the day.
For many, the market’s temptations are impossible to resist as they allow fear or greed to do the driving. But even the most rational among us occasionally wrestle with the nagging question – ‘given today’s opportunities or threats, am I are invested as I should be?’ Today many might feel as though they are missing opportunities trapped in the slow lane as faster cars pass them by. They wonder, should we join them in the fast lane to make better time, or by doing so, do we risk careening off a hidden curve just ahead as in 2008?
In this context, the markets’ tempting beckon is too much for many. It’s pull can be likened to that of the Sirens of Sirenum scopuli in Homer’s Odyssey. As the epic goes, the beautiful, yet dangerous creatures, lured nearby sailors with their enchanting music and voices to shipwreck upon their rocky island. The hero Ulysses, having been warned of their irresistible temptations, ordered his men to close their ears with wax so they might be deafened to the sirens’ beckoning. While insatiably curious to hear their calls, yet wise enough to guard against their temptation, Ulysses protected himself and crew against sure doom by ordering his men to chain him to the mast so he could not steer the ship toward the island when temptation overcame him.
Notwithstanding his temporary insanity, Ulysses solved his emotional need for curiosity by rationally planning for the certain loss of self-control that would come when aroused by the irresistible calls of the sirens. But we are not apt to chain ourselves to a mast, so what can we do to protect ourselves from losing control in heated moments?
Behavioral economist George Lowenstein calls this very human condition the ‘hot-cold empathy gap.’ In their book Nudge Richard Thaler and Cass Sunstein explain Lowenstwin’s observations as follows: “When in a cold state, we do not appreciate how much our desires and our behavior will be altered when we are ‘under the influence’ of arousal. As a result our behavior reflects a certain naïveté about the effects that context can have on choice.”
The authors go on to explain that we are comprised of essentially two semiautonomous selves; a far sighted “Planner” and a myopic “Doer.” The Planner speaks for our reflective system much like the Mr. Spock of Star Trek, while our Doer responds to our automatic (natural) system much like that of Homer Simpson. “The Planner is trying to promote [our] long-term welfare but must cope with the feelings, mischief, and strong will of the Doer, who is exposed to the temptations that come with arousal, ” say Thaler and Sunstein.
According to the authors, our Spock is controlled, effortful, deductive, slow, self-aware, and rule-following, while our Homer is uncontrolled, effortless, associative, fast, unconscious, and skilled. Spock represents our conscious thought while Homer quite colorfully exemplifies our gut reactions. Consider the following example of the tables.
As you consider the tables, make a determination as to the ratio of the length to width for each. If you answered something like 3:1 on the left and 1.5 :1 on the right you demonstrated both human and Homer-like characteristics. However, if instead of trusting your automatic system, you opted to exercise your reflective system by measuring the tables, you learned that the two tables are identical. Congratulations Mr. Spock. (Please join Mr. Spock by measuring them.)
When it comes to investing for a lifetime, wouldn’t we obviously want Mr. Spock calling the shots, and not Homer Simpson? But saying and doing are often not the same thing. Our best plans, calculated in cool reasoned moments can often evaporate when we find ourselves in heat-of-the-moment circumstances. We find that investing decisions are all too often made by Homer.
Let’s reconsider part of the question raised in the first paragraph – given the current rising stock market, should you hit the accelerator or stomp on the brake? Use the chart below to consider your responses both from the perspective of Mr. Spock and Homer.
The chart represents actual returns of the indexes represented by the funds we use in our seven model portfolios. Taking all seven back 40 years provides some fascinating observations. Each color represents the relative performance of the seven portfolios. On the bottom in gray is our most conservative portfolio consisting of 30% stocks and 70% fixed income and cash. Each color above the gray area represents the relative performance of portfolios with increasing percentages of stocks.
The first thing your Homer may notice is that the single $100,000 investment in March of 1973 became $5 million after 40 years without additions. He may also notice that the 100% stock portfolio did a full $2 million better than the 30% stock portfolio at $3 million.
Your Spock will notice, however, three steep and sharp peaks lasting about eight years each. He will observe that the peaks (even the small ones to the left) rise from and fall almost completely back to the gray 30% stock portfolio. He might reason that the ride experienced by those invested in the high-stock portfolios would have been a bumpy and sometimes terrifying ride toward their $5 million reward. He would also note that there were times where their asset levels fell back to those of the conservative 30% and 45% portfolios.
Pressing the point a step further, as Spock is often want to do, he observes that stock-heavy investors who required significant sums from their investments during 1987, 2002, or 2008 would have dipped deeply into risk-eroded principle. What’s more, had they set spending and lifestyle habits near the peaks, in 1999 or 2007 they were surely making drastic cuts in those plans a year later.
Now let’s come back to the present. The right most part of the chart represents today’s market levels. Given what it reveals about the last 40 years of history, what should you do, accelerate or brake? Did you answer as Mr. Spock or Homer?
In fact, you would hear Mr. Spock respond in character that the chart yielded insufficient data to provide an answer, In fact he would question the validity of the question.
Homer, on the other hand, might quickly and predictably provide an answer which was based on the emotion currently in the driver’s seat of his life; if fear he would be hitting the brakes, if greed, can’t you just see him screaming, step on it Marge!
Successful lifetime planning and investing should not be yanked around by automatic response systems. Clearly, with today’s ever constant and near-universal media stimuli carefully designed to arouse the Homers in all of us, we must either tie ourselves to the mast to merely survive or we must seek our own Mr. Spock to deliver the discipline, efficiency, and process we absolutely need to thrive, to safely navigate, and to ‘discover strange new worlds.’
If you are ready to seek out new and exciting opportunities or if you simply want to feel more confident about your future, why not add Mr. Spock to the bridge of your life’s voyage? Please consider making an appointment by phone or online to learn how.