Why Character Breeds Investment Success
“Always take the high road, it's far less crowded.” – Charlie Munger
Investing success is made up of two things, to an almost scientific degree—compounding and time horizon. As long as you don’t choose questionable, high-risk speculations and keep adding funds, you will very likely end up with much more than you contributed over many years. But people often interrupt compounding by pulling money out (and often at the worst possible time), or by not contributing enough early on.
Why do many of us make these mistakes despite knowing better?
It’s well documented that humans are bad at understanding exponential relationships like compounding returns. It’s why predictions for what can happen in the next year tend to over-estimate what may change while predictions about what can happen in 10 years tend to underestimate just how much can change. And more recently, humans are tending to have an even more limited ability to focus on anything beyond the near future—the abundance of data (both good and bad) and instantaneous communication have been squeezing our attention spans. Pair these two mechanisms together and you essentially have slightly-evolved primates that can only see straight lines that end a bit beyond their noses.
If you start early enough, you’ll have to stomach periodic volatile markets (10%-30% drops happening every couple of years), ignore countless “investing trends”, and have to keep your investment habits constant throughout numerous stages in your life. These stages of life involve switching careers, moving between different homes and geographies, developing (and losing) close relationships, and finding your passions change over time. To keep practicing good investment habits throughout takes immense discipline and consistency, even as your life evolves.
Where does character come into this?
Let’s try a thought experiment—you aren’t attempting to invest, but instead become a better person. A key characteristic of what most would consider a good person is someone that is empathetic. You are able to put yourself in someone else’s position to understand and feel what they might be going through, even if you aren’t personally in the same situation. You are also likely to consider how your actions might impact others and see your actions as less of a set of isolated acts and more of a compounding force with consequences.
Empathy involves considering conditions that you may not have seen, and circumstances that may have lead to those unseen conditions. Practicing empathy means you are considering effects on others in a humanistic way, and you may actually start to hone your ability for second-order thinking, which uses the same logic that makes compounding so mathematically magical.
In your pursuit to become a better person, you also strive to become more trustworthy. You want to have others rely on you when you say you are going to do something. You also want them to be confident when they seek your input, advice, or help that you will be giving an honest account that they won’t have to question. To be able to build trust with others takes time and repeated interactions where the opportunity for you to deviate exists, but you recognize the value that others have placed in you. And the longer you maintain your reliability and honesty, the more people’s trust in you becomes engrained.
Being able to build trust with someone means you are thinking about the opportunity and possibilities for the entire rest of your relationship with that individual. As the saying goes, it takes years to build trust and an instant to break it. Considering potential decades of a future relationship takes exactly the kind of mindset that investing for the long-term requires.
So, be empathetic and trustworthy - you may find that in your journey to become a better person, the most important factors for investing become second-nature.
Nicholas Menon
