The Game Of Investing

As a child of the 1980’s, I was among the generation of kids that grew-up with the first really affordable home computers and game console systems.  These early computers and game consoles taught us all the important skills we needed to succeed in life — Stomp on the bad guys to win.  Eat the dots and avoid the ghosts.  Head-shots are better than shooting the body or limbs.  Use the Konami code.  Missiles are the best way to kill Metroids, and always always use power-ups whenever possible!

When things didn’t go our way in-game, we simply pressed the reset button to start over.

Most importantly, I think growing up with computer technology, my generation learned not to fear digital technology.  Computers were no longer those super expensive things that launched men to the moon.  In the 80’s, we mostly played games with it.

Friends & Simulations

My first introduction into computers happened WAY back in 1983.  My family had just moved to a new town, and I was lucky enough to move next door to a kid that owned an Atari and a Commodore 64.

We eventually became best friends, and most afternoons I could be found over at his house — gaming away on Commodore 64 computers, Nintendo Entertainment Systems, and other digital entertainment products of that era.  Those were some good times.

In the 1980’s, computer technology suddenly became affordable (and good enough) to provide semi-realistic “simulations” with real-time feedback.  As digital computer technology has progressed over the following decades, it has been eventually rolled it into almost every aspect of our lives…  Everything has been ‘gameified’ now.  Including how we invest.

We no longer need “brokers” to make changes to our portfolio.  We can push all the buttons ourselves and see the results almost instantaneously, just like a video game.

With the power of the internet (and a few button clicks) we can quickly alter our portfolio to buy into whatever investment vehicles happen to be the hot ticket of the day:

• Zero Fee Index funds
• Bitcoin and other digital currencies
• International funds
• Real estate crowdfunding
• Target date funds
• Robo-advisors
• and so on….

Suddenly my financial life is no different from those video games I played during my childhood — Every year there’s a new “game” to play, and if I learn to play the game well enough and press all the right buttons I can be a (financial) winner!

That’s the myth we’re sold of course – The illusion that we can control our financial life outcome just by picking just the right mix of investments.

If things go poorly and we under-perform, it can quickly be fixed with nothing more than a few taps of our fingers. In other words, by “pressing the reset button”.

The Illusion of Instantaneous Control

Even though modern investors have access to lots of cool technology and neat investing products, I think investors in the old days might have been better off.  Back then, you actually had to call up your broker on the phone in order to make a portfolio change.

Not that I like brokers or their high fees, but the pace was slower then.  Transaction fees were higher, and investors needed to be so much more thoughtful before moving funds around.  Instead of trading on the hot news of the day, it paid to read annual reports and do a little thinking before pulling the trigger.

Today, we hardly have to think.  We simply react — Stock market not doing well?  Better re-balance a greater percentage into bonds.  Or, try bitcoin investing or that cool crowdfunded real estate venture.  Don’t like who just got elected?  Better move all your money into international funds….

It’s a game of constant reaction to “changing conditions”, that’s really no different than jumping in and out of different stocks.

Despite the illusion of instantaneous control offered up by digital investing platforms, investors are NOT better served today.  It’s the same as it ever was.  The only difference is we can make changes faster, cheaper, and with wider diversity than ever before….

It still doesn’t help us become better investors or see better financial outcomes.

Instead, Pick Your Game

In my view, investing isn’t really about the financial products or financial platforms you pick.  Those are just abstractions which invest in the real vehicles where wealth is built: businesses, real estate, resource harvesting, and debt.

It’s not the index fund that makes you money after all, it’s the core businesses underneath those abstractions that generate value.  Those core businesses generate value by putting products into people’s hands, loaning them money, or giving them a place to live.

I believe the real money is made by having a strategy, and then investing in those vehicles where wealth is built.

For example, buying and holding an index fund of the top 500 companies is a strategy.  A pretty good one in fact.  Over the long term, the businesses (stocks) held in that fund are likely to outperform bonds and probably even real estate.  The important part is sticking with it and not getting sucked into reacting when the investing tide changes.

It’s the equivalent of playing a game of chess compared to playing Fortnite.  One is reactive, and it requires speed and fast-twitch reflexes to win.  The other is a slow game of strategy and trying to out-wit your opponent.

They’re both entertaining games, but only one of those games I can actually win.  My reflexes aren’t nearly as fast as they used to be, and the kids playing online shooters are just sooo much better now days.

I have no hope of winning a game of Fortnite, so I pick the game where I have a chance of doing well — Something like chess or a board game that requires actual strategy.

With investing, it’s no different.  I can’t react fast enough (or correctly enough) to always pick the best performing investment.  It’s a game I’ll fail at every time, and this is exactly why actively managed mutual funds will under perform index funds.

They can’t consistently “win” at the investing game either.

So, what should a humble investor do instead?

Pick your game.  Simply choose to play the investing “game” where you have advantages and ignore everything else.

In my case those advantages are: having a savings rate higher than average, and maintaining a higher rate of compounding over time.  Nothing fancy, but it gets the job done and I’ve stuck with it.

Don’t Expect To Out-Perform

One important detail often lost on beginners — Don’t pick a strategy expecting you’ll outperform every year.  You won’t.

One year it’ll be internet stocks that are top performers.  Maybe next year it’ll be value stocks that “win” and the year after that it’ll be growth stocks or real estate funds.  Whatever.  You’ll simply never have the winning investment vehicle every year.

Even if your strategy is to “index and forget it”, you’ll likely under perform the index ever so slightly due to tiny fees and timing differences of when your funds get invested.

My point is — Expect to under perform on a regular basis.  This might sound pessimistic, but it’s realistic — especially if you hold more than one kind of investment product or investing vehicle.  The combined the mix of investments held in your portfolio is almost certain to under-perform due to the fact that it’s a blend of different investments.

Get comfortable with that fact that you won’t always be the winner.  Nobody likes to hear it, but it’s true!

The Bonus Round

Investing has certainly come a long ways since the days of calling up your broker and asking him to buy stocks.  It’s more like playing a video game now.  Maybe it’s even a bit more fun now that investing is more like a game.

But just like the coin-operated games found in the arcade parlors of yesteryear, investing isn’t really a game the designers want you to win.  They want you to keep pumping quarters into the game, or buying into the latest investing vehicle.

Your best bet however isn’t to play their game.  You’ll lose that one by design.

Instead, come up with a good strategy.  Write that strategy down, and just stick with it.  That’s your game.  Don’t fall prey to investing noise touting the latest products either… especially after you’ve had a bad year and under-performed.  That’s when every investor is weakest.

Don’t fall prey to those temptations.  You don’t want to be chasing performance.  You’ll be tempted, but remember that under-performance is normal once in awhile.  Just stick to your game.  Spend some time thinking and decide if your strategy is still sound.

Even the best investing strategies are going to fail once in awhile.  Make adjustments if necessary, but it’s not “game over” after one bad year.

[Image Credit: Flickr]