Nobody Wants To Get Rich Slowly
Today’s post was inspired by a family road trip we took a couple of weeks ago. On this particular road trip we were heading south on Interstate 5, driving slightly slower than the posted speed limit. I think we were averaging about 45 mph on the freeway with a posted speed limit of 60 mph.
Why was I driving slower than the posted speed limit?
Traffic of course. The Pacific Northwest is one of the fastest growing regions in the United States and the local road infrastructure hasn’t really kept pace with the population growth.
Traffic is pretty terrible almost all hours of the day here. It’s not convenient, but the problem isn’t going away anytime soon. Most of the time we just have to put-up with driving a little slower than the actual speed limit.
It makes for a very boring drive on family road trips. Mrs. Tako and the kids usually fall asleep while I make the (slow) drive to our destination.
For me, going slow isn’t a big deal… as long as we’re making progress I don’t mind. Eventually we will get to our destination. I’d rather get there safely rather than have an accident.
Unfortunately my laid-back attitude around driving in traffic is not shared by my fellow drivers on the road. Any chance they get, they’ll swerve between lanes — attempting to jump ahead. It’s often only by a single car length they manage to get ahead. These ‘moves’ can be incredibly dangerous too, risking life and limb for a tiny benefit.
If there’s a break in the traffic and speeds temporarily increase, I see many drivers gunning the accelerator like madmen — well above the posted speed limit in some fruitless attempt to “make up lost time”.
Again, this behavior achieves very little — in about 10 minutes those drivers just reach the next traffic jam.
At best, these speedy drivers might only shave a few minutes off their travel time, while risking a speeding ticket or potentially having an accident in their “big hurry”.
So why am I writing about the poor driving habits? I have this little theory that people drive very much like they invest.
Investing is very much about temperament and the emotional response to various stimuli. It’s the same with driving.
Chasing Performance
Stop me if you’ve heard this one before — An investor sees good past performance in an asset class (could be anything really — stocks, bonds, real estate, etc) and then invests, hoping to see similar gains. Maybe this works out for a little while, but eventually returns become sub-par.
Not wanting to put up with “slow” performance on this investing “highway”, the investor jumps out of one asset and into another. He or she hops into that other “lane” in the hope that it’s moving faster.
This activity isn’t without a cost however — investors frequently pay transaction fees to jump between assets. Usually these fees are small (or sometimes hidden). So small in-fact, that many investors never care how much “gasoline” their lane jumping activity actually costs.
The parallels to driving are relatively easy to see here.
Sometimes investors even try jumping onto “toll road” type investments in a fruitless attempt to outperform others. Nothing like a clear road with no other drivers, right?
These toll roads are hedge funds and actively managed mutual funds. Investors “pay up” in the hopes of achieving higher returns.
Unfortunately the good performance on “toll roads” has a significant cost — most hedge funds and actively managed mutual funds don’t outperform the indexes because of the high fees they charge.
At best, all this “furious” investing activity might only speed-up financial independence by a year or two… if the investor is lucky.
If they’re not lucky, serious accidents can happen when investing.
Aggression And Performance
Where does all this “aggressive” performance chasing behavior come from? Like it or not, I think it’s mainly cultural.
Western culture frequently rewards aggressive behavior. This behavioral training starts at a very young age. The first instance I can think of is with youth sports teams — essentially creating “mini wars” between two competing teams. The team with the most aggressive point-scoring behavior tends to “win” and the winners get the rewards.
School bullies also utilize aggressive behavior to achieve ‘wins’ — whether it’s stealing lunch money, humiliating competitors, or achieving elevated social status.
This behavior training continues all through our youth and well into adulthood. Aggressive “go-getters” in a corporate setting receive most of the rewards — raises, promotions, and mini-fiefdoms within the corporate machine.
To the aggressive go the spoils.
All this aggression might have served humans well back in the stone-ages — When cavemen had to physically compete for resources against other cavemen. This behavior worked well for scoring food, shelter, mates, etc.
But when it comes to investing, aggressive behavior isn’t a sure-fire path to success in investing. Sometimes being the farmer instead of the hunter is a more successful long-term strategy.
Impatience
We also live in a culture defined by speed. Billionaires are made in an instant when companies go public. We have near-instantaneous communication with the entire world. I can hop on a plane and be anywhere on the planet in less than 24 hours. Amazon can deliver anything to my door in less than 24 hours.
We live in an age when people are entirely used to going fast.
Frankly, we’re spoiled by speed and it makes us impatient little babies — Impatient for results. Impatient for investing returns. Impatient for financial independence.
But the best investors are actually incredibly patient people.
For example — Fidelity once did a study of which clients achieved the best performance returns. Turns out, the study showed clients with the best returns were actually investors that forgot they had accounts at Fidelity.
(That’s the ultimate in patience … when you completely forget you had investments!)
Warren Buffett is probably the pinnacle of this kind of investing patience. He bought 5% of American Express way back in 1964 and still holds those shares today. That’s a 54 year holding period.
Another example is Geico — Buffett first purchased GEICO shares back in 1976 for around $2 per share. Today Berkshire Hathaway owns 100% of this iconic auto insurance company. It’s worth untold billions.
Those are crazy long holding periods, right? It’s no accident. Buffett made a great portion of his wealth by just sitting on good investments for a very long time and letting them compound.
Sounds easy, right?
It might be harder than you think to stay the course.
Buffett was recently asked at a Berkshire Hathaway annual meeting,”Why don’t more people copy your strategy?”
His deadpan response was absolutely legendary — “Nobody wants to get rich slowly.”
It’s All About Compounding
Compounding isn’t all that hard to achieve, but it’s really boring to watch. Unlike the old folk tale about a rice grain doubling every day, compounding actually takes decades.
Few people have the patience to wait decades anymore. Just like those insane drivers on our recent road trip — eventually humans just get bored with waiting around in the slow lane. They jump ship looking for a little speed and excitement.
This doesn’t get emphasized enough — Investors who chase short term performance do themselves a great disservice by chasing gains. Maybe they succeed in beating the index for one or two years, but what about the next 40 years?
Eventually they’ll make a mistake and destroy capital.
This is really important: It’s not about speed. It’s about making it to the destination.
The majority of really big gains in investing come from compounding … and that kind of compounding takes a very long time.
Final Thoughts
When I first started investing back in the 1990’s, I was actually a terrible investor. I chased performance and tried to invest in the hot technology mutual funds of the time. I’d jump in and out of those mutual funds and stocks trying to find good returns. All the while I thought I was making good progress.
It was a disaster of course — I didn’t make any money because I didn’t truly understand compounding.
Today I’m more interested in slow growth with compounding. This is exactly why most of my holding periods are now getting close to a decade or longer. Compounding is slow.
My longest holding period for a single stock is nearly 17 years.
The real “trick” to investing is keeping compounding happening continuously over decades. Plowing cash into good investments year after year, and simply sitting on them. Forgetting they exist. Meanwhile those investments allocate capital in ways that keep earnings compounding year after year.
It’s not glamorous and it’s not fast. But you do get rich slowly. It takes decades, but eventually the snowball really gets going.
This is exactly why young investors are advised to start early and save a lot — The real returns aren’t in short term performance, they’re found by achieving compounding over very long periods of time.
For me, I would rather get rich slowly rather than not at all.
Awesome post Tako. This hits a touch-point for me. The real problems with aggressive driving and speeding on the road is that it puts 40,000 bodies in the ground every year in America.
Forty-thousand people…. Dead. Gone, forever. Over 100 per day. It’s beyond tragic.
Yet we make movies about how fast cars are cool, and show “entertaining” scenes of movie stars speeding through city streets, endangering everyone around them. Same for TV commercials – they actually sell more cars by showing reprehensibly irresponsible and reckless behavior. It’s lunacy.
I love your post – you drew great parallels between investing and driving. But poor investing will likely not kill. Poor and irresponsible driving kills, every day. Four people every hour will be killed from it in America, and it never stops…. Every 15 minutes, another victim
Sorry, don’t want to be a Debbie-Downer, but just a friendly reminder to folks to put the phone down when in the car and drive.
And oh yeah, speed and aggressiveness also suck when it comes to your money 🙂
Good reminder Accidental FIRE. Drive safe this memorial day weekend everybody!
Great article. It’s also why my main metric is the dividend return portion of my portfolio, and that has been growing by a compounded 16% rate over the past four years since I started investing this way.
When price goes way up and forward expectations are very high I think about lightening and exiting the position and to replace it with something else that has compelling value. I’m happy to have the majority of the holdings just continue slowly compounding.
-Mike
Thanks Mike! A growing stream of dividends is often a sign of compounding at work! Not always, but sometimes.
BMW drivers, eh? I usually drive pretty conservatively too. It’s way easier to just stick to one lane instead of changing back and forth. It’s annoying for everyone when someone cuts back and forth so much. I’m pretty sure it worsen the traffic jam when you do that instead of going with the flow.
Investing slow is way easier too. I only make a few transactions per year now. Being too aggressive isn’t good when it comes to investing. Changing back and forth too much is the recipe for poor performance.
I didn’t actually say anything about BMW drivers in the post Joe…
But I totally agree — aggression in investing isn’t good! 🙂
Great post! “Get Rich Slowly” could be the title of an investment book, but it would not sell very quickly.
Hmm…. interesting idea Bob!
Good article. You’re right – we are a pretty impatient culture. With technology, we can now have things instantly with the push of a button. Waiting decades, like you said, is out of the question when our attention spans are so short.
I think a big problem in my mind is that I would like FIRE while I’m young enough to enjoy its’ benefits. I’d hate to wait decades only to have FIRE with a frail mind and body. So if I feel that way, I can imagine that others want riches quickly enough so that they can enjoy it while they’re young.
That mindset, as you pointed out, can lead to some pretty bad decisions due to the “rush” factor.
Yeah, there’s definitely a balance between the desire to retire earlier and the aggressiveness of a portfolio. Sometimes scaling back to less aggressive investments means you go faster… but that’s a post for another day…
It took me over 15 years of work as a physician to become FI. Looking back, it seems like a reasonably short career span. Looking forward from when I started I would think that is too long. Getting rich slowly is the only way open to most of us, so we might as well embrace it!
Absolutely. 15 years is actually a pretty short career compared to the average, so I think you were pretty quick!
I didn’t know the origin of the phrase “get rich slowly.” Now it makes a lot of sense. I think the hardest part for people, too, is that it takes such a long time to get to the “fruits” of exponential growth, that it feels like nothing is happening for the longest time. In the “double your penny each day for a month” experiment, you only $163 by Day 15, halfway through the month. When people start investing, nothing much happens for a long time and I think it’s hard for them to trust that it’s going to work if they stick with it. That’s probably why most of us in the PF space are contrarian and can drown out the noise of the masses.
Interesting point Laurie! It *does* take a long time for compounding to get going, but once it actually takes off, boy does it feel fast!
Very nice post 🙂 “It’s not about speed. It’s about making it to the destination. “, it’s absolutely true. Even though it may be, it’s better to arrive at the destination being alive than die trying to get there too fast.
Yup Yup! Thanks for reading Poor Swiss!
Great post. I love that Fidelity study you mentioned. I remember once taking six years to roll over an old 401(k). Mainly because it was doing so well. As soon as I rolled it over and started Chasing hot mutual funds and stocks, performance hit the Skids. I eventually saw the light and purchased some low-cost Total market index funds. Since then I’ve learned to simply buy and hold, adjusting allocations a few times a year. Like driving, it’s a much less stressful way to go about things.
Exactly! Why would I want more stress when I’m driving or investing? The result will be *nearly* the same. Might as well take the safer road!
17 years is definitely a long time! It’s just emotionally difficult for any human when there is a correction to not want to escape. I think the best thing I can do is just stop checking the portfolio and try my best to keep myself busy like blogging or going outside or travel to keep myself from taking crazy cap gain loss in the next bear.
Keeping yourself busy is a very good strategy! Mastering emotions (or temperament as it’s sometimes called) is the key to making good investing decisions.
Nice analogy! The comparison to the impatience of driving sounds extremely familiar to me when I started investing as well – always chasing the latest news of reading what fund did the best over the last year and letting that impact my decisions. Feels amazing not to do that anymore. Now if I could stop switching lanes while driving, I’ll be all set. 😉
Bad habits are hard to break! Good luck to you! 😉
I’m always amazed at how absolutely terrible people drive, just to save a few minutes. It makes no sense and it adds so much more risk to their drive… much like how people invest. 🙂
It is sad how impatient people are and how they take risks for such a low/bad payoffs. 🙁
Yep! You got it Jim. I suppose this is one of the reasons why financial independence is a relatively rare occurance!
“Billionaires are made in an instant when companies go public.”
Yeah great point!!! What is wrong with people. Buying within 6 months of going public is more of a gamble and you’re paying extra for the excitement. You’re not getting a deal suckers!
Yup, IPOs are usually a terrible deal for investors.
They just don’t understand it’s the founders selling their shares for the highest possible price.
Everybody should do everything more slowly and deliberately. No just get rich. Travel slowly and take in the sights and enjoy the company of a different kind of people while in a different country. Live more slowly and enjoy life with intentionality. It’s funny how your first picture displays a bunch of cars on what appears to be the autobahn filled with German autos in the European Union. It’s interesting because it was my first trip to Europe where I learned to live life more slowly, relax, be more mindful, and enjoy being in the moment.
Also… people who are uber-aggressive and impatient (the type A’s of the world) often die sooner (mostly from heart disease). Live fast, die sooner.
If we all learn to live and get rich slowly, we would all be a little bit happier.
Solid point Dr. McFrugal! 🙂 I haven’t spent a lot of time in Europe, but the areas I’ve been the hustle and bustle seemed pretty similar to the American Hurry.
One of the myriad ways rural life beats city life is our roads are mostly free of cars. Driving is actually fun here. However I think you are combining the concepts of ambition and aggression when they are closer to being polar opposites. Aggressive people rarely succeed in a corporate environment while ambitious people rarely fail. Ambitious people understand what works and they adopt that at work and while investing. They may use aggression as a tool occasionally but they are motivated by success and use the tools that experience shows are most effective. The reason America has had the world’s most successful economy is that our culture emphasizes ambition, not aggression. Those aggressive drivers aren’t ambitious, they are people who lack ambition and are acting out their frustration. But that’s just my theory and I might be off base, again.
Yeah, we’re going to need to agree to disagree here. I know the difference between ambition and aggression, but they often coincide.
In my experience working for Fortune 500 companies most of my life, the most aggressive go-getters get the rewards because they do it at the expense of their co-workers. Often undermining them, taking credit for work that was only partially theirs, pandering and politicking with management, and sometimes firing good hard working people that don’t fall in line with their agenda. Or worse.
I’ve seen some of the most disgusting human behavior in the world and it happened in a corporate setting.
Coming from someone who drives all too much and in the high traffic area of Los Angeles, your post really resonating with me. Over the years, I have learned to just be patient and let everyone around me drive all crazy in hopes of getting to their destination faster. When getting cut off or watching someone serving in and out of lanes, I find myself mumbling “I choose life” as I just let them do their thing and watch from a distance. I love this analogy to investing, since it is so true. The connection between being an emotional driver and an emotional investor is spot on. Just watch out for the #financialroadrage!
Hell yes! #financialroadrage!
Hedge fund DO work as a slice of your asset allocation under “alternatives.” The key is to be selective and I’m invested in two separate such funds and their performance, especially this year has been great (one was +2.4% in February, the other was -0.8% in February). I wrote a very detailed article about all this here:
https://firechecklist.net/2018/03/31/alternatives-part-ii/
Here’s one more, specifically on a hedge fund:
https://firechecklist.net/2018/03/29/alternatives-as-an-asset-class-part-i/
Great post, Mr. Tako. Your points hit especially close to home as I’ve started to re-evaluate my portfolio to emphasize shorter term cash flow, since the amount I’ve saved so far *should* be more than enough at traditional retirement age.
Part of me has to wonder whether emphasizing more immediate cash flow is the right move, or if I’m just getting impatient with getting rich slowly. Your post really helped me reflect on that, and I’d appreciate your thoughts as I write about it more in the coming weeks on my blog!
Sure, no problem! Looking forward to it.
I really like this post, and it’s so true. People aren’t patient, but in this case, patience is greatly rewarded. I’m very curious where I’ll be in 10 years if I just let things sit… hopefully I’ll be getting around in a used self-driving car because I really hate driving 🙂
I’ve pondered this idea more and more in recent times. I’ve always aimed to hustle, make money, save hard and get to FI asap. Now, I’m starting to consider a slow and steady approach. Have a longer career, but better work-life balance throughout, save well but enjoy life and let compounding and the market go to work. Early FI would require a larger FI number, working harder, more brute-force savings, less compounding, more taxes, etc.
Great analogy, Mr. Tako! It’s so try that being impatient is what causes investors to lose money by dancing in and out of the market. I’m not sure it’s a cultural thing or just the human need to feel in control. When you do something, like cut in front of other cars in traffic or try to get big gains by making risky moves, you FEEL like you’re accomplishing something but in reality you’re just shooting yourself in the foot. I remember reading somewhere that statistically women are better investors because of risk aversion, less aggression and patience.
Slow and steady wins the race. It’s not about hitting a home run and more about not shooting yourself in the foot.
So, so true. I even wrote a blog post called Patience is the key to wealth. I remember David Bach, the author of Automatic Millionaire, saying “when you not busy trying to get rich, you will get rich slow.” He was just dropping gems.
Miriam