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It's unrealistic to expect anyone to invest totally dispassionately. But there are ways to transform risk, writes Hannes Viljoen.
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There is well-known story - possibly apocryphal (I say apocryphal because I have been unable to find the original study, even though the study is widely referred to) that Fidelity did an internal review of the performance of their clients’ portfolios over a period from 2003 to 2013. What they allegedly found was that the best performing clients were the ones that were either inactive, i.e. they had forgotten about their assets, or dead.
While one correct lesson from this tale would be to not get emotionally involved in your investments and their performance, there is another too.
Asking someone to not get emotionally involved in their money, finances and investments might be a rational request from any academic, but not reasonable. Money is personal. Entrusting your hard-earned money to someone to invest it in such a way as to reach a specific goal is a daunting endeavour. Then, expecting the investor to simply scuff at the fact that their equity investments could very well be down by 40% during a prolonged bear market is unreasonable.
Advice to invest your money in the equity market and then just to ‘forget about it’ is also a tough ask. I might be amiss, but the clients in the Fidelity study did not want to forget about their investments. It just happened. It would be a fairy tale to request someone to invest, but each time after you invest, then to ‘forget about it’ (as per Johnny Depp in Donnie Brasco).
On an appropriately regular basis, you need to review to make sure you are still on track, whether you are investing for retirement, a firm for a certain objective, or a family office when you are building multi-generational wealth.
So while good advice would be to keep your emotion out of investing it is the understanding of another lesson from the Fidelity study where the answer might lie. And the lesson is that time transforms risk.
There are many books written about Warren Buffet and how he has amassed his enormous wealth (more than 2 000!). The strategies in these books range from ‘Cigar Butt Investing’ to ‘buying reasonable companies at a good price’ investment strategy before meeting Charlie Munger, who changed his philosophy to ‘buying good companies at a reasonable price’. Many have tried to replicate these strategies and I would bet many have done so, too, with great success.
But there is one more thing that Buffet and Munger have in common besides both being in their 90s (Buffet 92 and Munger 99) - and that is their understanding of how time transforms risk.
At the time Morgan Housel wrote his book, The Psychology of Money, in 2021, Warren Buffet had an estimated net worth of $84.5bn. The interesting thing is that $81.5bn of that wealth came after his 65th birthday. That is more than 95% of his wealth was accumulated after what is now seen as the normal retirement age. If Mr. Buffet took his measly $3bn at age 65 and ‘rode off into the sunset’, very few people would have heard of him. But he kept on going. No doubt making mistakes along the way but also made quite a few good decisions and on of them was to keep on going.
The longer your time horizon, the more risk, the probability of a bad outcome, transforms from being high to low.
A young inexperienced batsman might top-edge Kagiso Rabada for a six, but the longer they play, the higher the probability that the batsmen might be bowled out.
A lucky young teenager might deliver the serve of his life and ace Roger Federer, but the longer they play, the the more apparent it will become who the master is.
A high school goalkeeper might guess the correct side when defending a penalty kick form Lionel Messi, and stop the ball, but the more times Lionel takes a penalty the higher the probability the scoreboard will tilt in his favour.
If risk is described as the probability of a bad outcome, and if time reduces the probability of a bad outcome in investing, time has transformed risk.
The longer you invest and not take your money out of the market (stop when you are hit for a six, give up when you are aced or quit after a blocked penalty kick) the higher the probability that you will have success in investing.
Now I am not advocating that you literarily never, ever, retire and just keep on going until you are 99 or beyond. I am, however, advocating that the longer you keep on investing, the higher the probability that you could be the next Buffet - or at least a little closer.
Hannes Viljoen, CFA, CFP®, is the CEO and head of investments at Kudala Wealth. News24 encourages freedom of speech and the expression of diverse views. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.
