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
- 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]
16 thoughts on “The Game Of Investing”
Great post and great memories. I’m of the same era but we couldn’t afford a computer. There was one kid at school that had a Tandy 1000 if you remember those. I remember seeing it and being amazed. And when the movie “War Games” came out me and my friends loved it and thought maybe the world was going to end because of these crazy computers.
“Your best bet however isn’t to play their game. You’ll lose that one by design.”
That sums it up nicely. It’s like a casino. They boldly advertise the odds to you – you know the books are cooked against you. Yet still people play.
Oh yeah, I knew a guy that had one of those Tandy computers. They were pretty good computers back in the day, and fairly affordable. I remember playing the original Space Quest on one. 🙂
I agree. Great memories. I still remember the codes to unlock certain video games. Fun times!
These games were my Jam!
Atari – Mega Mania
Nintendo – Maniac Mansion, Super Mario, Contra
Sega – Earthworm Jim, Battle Toads
Liked the comparison with the good old 80s games. We are all guilty of that 🙂
By the way, the sound was 50% of the experience. A few years ago there were even Rockband festivals in GB covering the old C64 songs….just had a look..last year in Sweden 🙂 )
“The combined 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.”
True, if measured against total maximum possible return, with volatility no question.
But risk adjusted, diversification over different asset classes should have positive effects on the portfolio.
Indeed, supposedly there are positives to diversification even though it lowers returns. There are several theories, the primary theory being that it lowers overall risk.
It can also lower volatility too, which is nice for investors with weaker stomachs. 😉 Smoothing out the ride doesn’t necessarily raise returns over the long-term — typically it lowers average returns.
Not always though. I have seen academic papers which study individuals who have lowered volatility and increased returns. They are considered mathematics anomalies however.
Great post. The C64 and it’s “64K Ram System” was such an amazing machine. I played way too many games (Lode Runner and Boulder Dash were long time favorite). Ultimately this was what got me into programming and the career I would later choose so I’m pretty grateful for that.
As far investment, I agree that technology can help us react more quickly but as you said, as long as you stick to a very simple technology! And for us a good strategy came after reading some life changing books like these: Books).
We had an Apple IIe, with a green screen. Great machine. Then my mate up the road got an IBM PC with a 4 colour monitor and we used to play Test Drive on it. That was the height of luxury in 1985!
Couldn’t agree more. The speeding up of financial services (which I think is just another form of “consumption”), doesn’t make you better off. It only makes the broker / product producer richer. It all boils down to how much are you paying for a stream of cashflows and how certain / uncertain are those cash flows (i.e. the risk). No matter whether its a bank deposit or a bitcoin. Same theory applies.
Having all the nostalgia feels right now! Continuing the analogy, my strategy for investing is similar to those long games of Age of Empires. I set my peasants (dollars) to work, returning resources that I can then reinvest into more workers and building defences against attacks on my settlement (portfolio) so that it can grow and prosper for the long haul. You shouldn’t need too much adjustment to get through threats if you’ve set up the groundwork well from the start.
You reminded me of the days I first learned how to play my favorite games on the PC. I used to love Quake II, IGI, and some other games. The analogy here is so apt. The access to make knee jerk reactions to stock market with the click of a button is scary!
I have resisted his myself and have indexed in my own portfolio. But I admit I was tempted too, to make some moves. I am glad I didn’t.
I’m too aware of my own limitations (on attention and the energy to research companies for the best investments) to try investing myself. That is, as far as picking individual stocks. Right now I’m just trying to play catch-up on retirement, but if/when it comes to regular investing I’ll be trusting a index fund or something that that’s managed for me by people better-versed in the world of investing.
Just like getting better at playing a game, you need to put in the effort and time to get better at investing. Spend the time getting educated, practice the craft, and analysis the results. Think about how you can do better – both in your investment strategy and your execution and implementation of such strategy. In my opinion, to win in the game of investing, time, energy and effort are all required.
Super fun analogy to compare investing to computer games. Though, with computer games, the more exciting the better, and with investing, the more boring it is the better. Good thing I like the slower, more boring games like Settlers of Catan–less action, more thinking and strategy.
Btw, have you ever heard of the game “Celeste”? Apparently, it’s a revolutionary game that helps people overcome anxiety and depression. I find it quite fascinating (thought I really suck at it because it requires fast reaction time–though it’s pretty cool in that you can change the settings to adapt to your learning style.)
Yeah, I actually have played Celeste. I suck at it too though… it does require super fast reaction times. Maybe I was that fast in my teenage years, but not anymore!
BTW: How’s Thailand?
Great post as always Mr tako! Now… Where’s tawcan for some starcraft talk?
HaHa, entertaining post Mr Tako. It is funny to think about how far we’ve moved from calling brokers and reading the WSJ for data when it was published to today where there are trading algorithms and AI out there. It can certainly feel like a weird video game when we use the computer as our portal and most of our money is no more real than another similar networked computer that is storing the digital record which is the money in bits and bytes that we have “earned”
This post makes me smile because I am an 80’s baby. My sister always says the best year of her life was 1984! Some of my best childhood memories are of playing Nintendo. I also loved Saturday morning cartoons! I even wrote a blog post about it.
I know what you mean about picking the game you knew you could do well. I tend to try to make sure I’m winning in one way or another. I like to multitask. I can chew gum and buy stocks at the same time. I will read books, go to the gym, study, save, and invest all at the same time. If something does not pan out, at least I got 1 or 2 things done. I like to keep moving forward. If if I can’t get rich quick, I can do it slow or as I like to call it leisurely. All good things come in time and to those who wait.