In the recommended reading section, you’ll find three authors that have helped me realize the limits, and benefits, of memory (Cialdini, Kahneman, Munger). Understanding how memory works is helpful for:
- Creating systems to avoid repeating mistakes
- Creating schedules to refresh one’s self in the memories of key individuals
- Understanding how the recent past will skew current decision making
- ‘Tricking’ yourself into satisfaction
A handful of individuals have had a disproportionately positive impact on my life. It’s near impossible to know which situations are going to be “big winners” (hopefully, your spouse and kids score well). Focusing on my “winners” is a strategy that’s served me well.
Two weeks ago, I shared how I map my family eco-system. I’ve found that having fun once a quarter is what it takes to have a strong relationship with people (I don’t live with). Between the quarterly “fun,” I like to work on projects with the key people in my life.
Understanding the impact of the recent past is what I want to discuss today. Specifically, how past memories influence current investment decisions.
I’ve found that my memory is dominated by the last three years and this is very dangerous for my decision making. An example can been found in our perception of public figures – cast your mind back to:
- Bill Clinton (impeached in December 1998)
- Yahoo (peak market cap in January 2000)
- Tiger Woods (infidelity scandal in November 2009)
The value in understanding the flaws of memory, lies not in keeping ourselves vigilant towards others! The value lies in avoiding traps in our own lives.
- the yield on low-risk assets has disappeared
- investment capital has been tough to find
- most of us have experienced very low inflation
- long-term interest rates are the lowest for 150 years
Despite the unique nature of all-of-the-above, most of us expect these situations to prevail for the next three years. In my cognitive world, three-years-backwards and three-years-forwards seems very close to the definition of forever. Some big mistakes are going to be made over the next decade!
Whether I’m feeling stressed about the rate of return on my portfolio, or worried that my kids will never mature… I’m going to give too much weight to the last 18 months and expectations for the next 18 months.
My family history tells me that the near-future (measured ten years out) is going to be nothing like we expect. For 20 years out, we’re totally clueless!
I would encourage you to pause and consider how the recent past may be skewing current judgements. I’ve been finding mistakes in my own thinking (some potentially worth a lot of money to my family).
I’m going to share a couple of mantras that I use when I’m unsure. The present is so different from the last 50 years that I’m returning to basics:
- If in doubt then wait
- The most important part of investing is saving
- Be patient, wait for panics and mean reversion
- Collect experiences, not possessions
To end, remember that we can favorably skew the memories of others by having fun with them quarterly!
Finally, ask your spouse (or kids) how often they have fun with you. With the holidays coming up, we can get strategic benefit from fun and strategic gifting (small, frequent and unexpected).