A star pretending to be the sun.
With thanks, by Carl Richards, creator of the Sketch Guy column in The New York Times.
Hey, I have a question for you.
Do you remember being a kid and pretending you could fly?
I sure do. Now, let me ask you another question. Do you remember jumping off a roof to test that theory?
No? Ok, good. Me neither. You know why? Because even as kids, we knew what it meant to make-believe.
Funny how things we know as kids we tend to forget as adults...
For example, a lot of people like to make-believe that they know how to invest. They get some skin in the game, forget they aren't real investors, and the next thing you know, they're doing the financial equivalent of jumping off the roof (with equally predictable results).
. . .
There's a lot riding on whether you are a real investor or a make-believe investor. Not sure which category you fall into? The following breakdown may help:
- Make-Believe investors think the stuff they hear on the financial networks is real. Real investors know it might be entertaining, like going to the circus, but they know it is mostly noise and would never make a decision because of what they saw there.
- Make-Believe investors think it makes sense to change their investments based on politics: There's a new president, so act! He doesn't like the Federal Reserve, so trade! He criticized bankers, so buy bank stocks! Real investors know they make changes to their investments based on what happens in their own lives. If their goals change or there is a fundamental change in their financial situation, then they consider an alteration.
- Make-Believe investors monitor their investments obsessively. The result tends to be poorly thought out, knee jerk reactions to... the financial networks. Real investors know that it takes a long time for a tree to grow, and it will not help to dig it up to see if the roots are still there. The same rule applies to investments.
- Make-Believe investors talk the talk. You know, investor jargon: alpha, beta, P/E, market cap, time horizon, long this, short that. Beware of this kind of talk. It sounds kind of impressive if you don't listen too closely, but it is also a dead giveaway that you're not a real investor. Real investors walk the walk. You know, not so much saying as doing. And the thing they tend to be doing is sticking to their financial plan.
- Make-Believe investors worry endlessly about some far-off part of the world and the impact global politics have on their portfolio. Real investors focus on the things they can control, like saving a bit more next year, keeping their investment costs low, and managing their behaviour by not buying high and selling low.
- Make-Believe investors complain endlessly about volatility in the market and external actions that have a short-term impact on the big bets they have made on individual stocks. Real investors take the long view. Between 1996 and 2016, markets were up more than 180 percent. That included the financial crisis of 2008. Real Investors saw that crisis as a dip; not the end of the world.
. . .
Think of this as a kind of litmus test. A six-part quiz to see what kind of investor you are.
Look, there's nothing wrong with playing make-believe. But there is something wrong with acting on it. I'm not telling you to stop using investor jargon and watching the financial news. By all means, watch to your heart's content.
Just don't jump off the roof because you convinced yourself you can fly.
CARL RICHARDS is the creator of the Sketch Guy column in The New York Times.
Keep asking good questions