Human beings have a distinct superiority complex. They tend to look down on other animals as they consider themselves to be more intelligent and capable of doing complex activities. They possess a vast array of skill sets. No other creature can talk, read, write, solve complex mathematical problems, create space ships, explore the vast expanse of the universe, and invent computers and internet amongst others.
Human beings are in the 800th life time, as per Alvin Toffler. They have evolved from the time they were in the caves, with behaviour resembling that of wild animals to their predominant position as the numero uno species of the planet earth. The evolution has been astounding; especially during the past couple of centuries. Humans are the only species to create money and invest it.
There is many a time when human behaviour tends to resemble those of animals. At times he shows the savagery of a wild lion, the cunning of a fox or the tomfoolery of a monkey.
However, in the area of investing money, there is a reversal of the process of evolution. The tendency to revert to animal behaviour is manifest in the way we conduct our personal financial affairs.
In the context of investment behaviour, Human beings can be classified into four archetypes: greedy monkey, thrifty squirrel, hungry hound and astute dolphin.
Monkeys are gamblers. They take high risks. They are eternally restless and just can’t resist playing the market. They are highly intelligent. However, there is only one major fault line. They completely disregard the fact that every win is followed, sooner or later, by losses.
“Isaac Newton came into a substantial inheritance. Typical of the man, he immediately put his wealth into work.
At the time, the South Sea company was the talk of town when it came to trading in shares. Newton, after thinking long and hard, purchased some stock of the company and was thrilled to see his investment doubling in a few months.
Being the wise man that he is, he sold his stock in the company and made a tidy profit. What followed was utterly inexplicable and bizarre. The share price of the South Sea company shot up northward and in a span of eight months grew 8-fold. Newton, to his dismay saw his friends’ wealth soaring and regretted his decision to book profits early.
The greedy monkey in him showed up. He reinvested his entire capital in the Company again when the prices were at an all time high. The bubble burst immediately afterwards. Newton lost all his wealth in a single stroke of fate.
Remember, it was Newton who taught us,
‘What goes up must come down’, and
‘For every action there is an equal and opposite reaction’
For once, he didn’t pay heed to his own laws.”
So beware! One’s IQ provides no guarantee of success in the investment game. Even, arguably the greatest brain in the history of mankind couldn’t resist monkey behaviour and failed miserably.
The Monkey Investment Strategy – attempting to outsmart the market – has as little chance of succeeding as hitting the jackpot in a lottery.
Squirrels are apprehensive about the world. They are accumulators and are at ease only when they have a well-stocked larder. This is their only strategy for the future. There is however a downside to this. The squirrels’ buried reserves often rot or disappear altogether before they can be reclaimed.
“Mr. and Mrs. Whitefield got married in 1930’s. They were prudent, thrifty and lived modestly. They were very good at savings as were a large number of middle class families of that time. By 1950’s, they have accumulated a tidy fortune.
Being old fashioned, and influenced by the great depression of the 1929 when the financial institutions collapsed leaving many bankrupt, Mr.Whitefield had no faith in any financial institutions and left to himself would have kept the money under his bed, in a cash chest. However, he bowed to the wishes of his more practical wife, who convinced him that it was more prudent to open a savings account with the biggest bank in the town. The money will generate a small interest, liquidity was not a problem and the banks credentials were rock solid.
Years rolled by, the money was safe in the savings account of the biggest bank. The Whitefield’s were stress free.
Then, Mr.Whitefield died in his sleep one day in late 1990’s. His wife soon followed. She left her savings to, Carol, her niece.
Carol, knowing the prudent living style of her Uncle and Aunt and expecting that the savings would have grown substantially in the decades passed, walked across to the bank and asked for the entire money.
She was shocked to find out that there was no fortune there. The ravages of inflation had depleted her inheritance to a pittance. Back in 1950, her money would have bought a spacious three bed room family home in a decent suburb; fifty years later, it wasn’t enough for a deposit.”
Inflation is devastating over a long period of time. It has a terrifying capacity to consume capital. Yet, most people neither are aware of its implications nor have equipped themselves to handle it properly.
Majority of the people, especially the middle class, adopt the Thrifty Squirrel Investment Strategy. They are fearful of the complex world of investment and tend to take the ‘safest’ route: big bank, low interest. Little knowing that it’s the safest route to ruin the long run.
Hounds are compulsive animals. Conspicuous spenders, they are driven by a need to constantly display their superiority in the pack. They are unaware of the futility of chasing their own tail and there is no known cure for their chronic hunger condition.
“David Brenson was born with a silver spoon in his mouth. He was destined to be at the top. He did not disappoint.
Topper in the law college, he was given the pick of the best firms in the town to practice corporate law. He put in long hours at work, but then you have to make the sacrifice to reach the top. And it had its compensations - a large villa, the most expensive car, and expensive paid holidays in the Alps. The parties thrown by he and his wife were legendary and they were a constant presence in the most fashionable social events in the town.
Money was never a problem. He found ways and means to spend money to minimise tax, without regard to long-term goals or quality of investments. With banks ready to extend him unlimited credit, he appeared to be on cloud nine.
Then one day, the pack of cards collapsed. His debts had mounted to uncontrollable proportions and his investments plummeted.
Left with no option, David filed for bankruptcy. He became a liability and embarrassment to his firm. His friends gave him the cold shoulder.
At the age of forty five, David was back to square one, unemployed, with nothing to show for his life time achievements.”
It’s seductive to believe that you’re invincible when you are on a roll. But ask yourself: are you really as much worth as you or others think you are?
The Hounds Strategy of splurging without a care for the future, is more common during the last decade than ever before. Easy credit, high paying initial jobs and a tendency to live for the day are certain to lead you to the path of doom.
Dolphins possess an almost human-like intelligence. If they were investors, they’d be the astute kind – certain of their direction, they’d manage the occasional market storm with resolve, skill and grace.
“Warren Buffet, perhaps the most successful investor of all time, started off humbly. He bought his first stock for $ 38 at the age of eleven.
Today, he is worth $ 38 billion.
He is not a magician. Neither does he have a crystal ball. Warren Buffet’s approach to investment is simple and old fashioned. He has steadfastly avoided all the trends and fads of the Wall Street. His major holdings show a tinge of conservatism. Coca-Cola, American Express, Gillette …. He has not touched a single internet stock nor has he gone after anything exotic.
He has a long-term strategy. He looks at the stock’s inherent value, quality of the management and its prospects. Once he takes a decision to buy, he hangs on to the stock, irrespective of the ups and downs of the share price movements.
His philosophy “ is to invest successfully over a lifetime. It does not require stratospheric IQ, unusual business insights or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. It is better to be sure of a good result than hopeful of a great one”
Sounds rather simple and basic?
If you had invested $ 10,000 in Warren Buffet’s company in 1965, your net worth will be over $ 50 million today, a hundred times more than if you’d invested in Wall Street’s S&P index.
Since you have not done that, at least follow his Dolphin Investment Approach: set long- term goals, develop your own sound plan and most important stick to it.
Even if you’re astute, prudent and disciplined, you still need to fully understand the risks. In the world of stock markets, the adage of “better safe than sorry” is particularly apt.
So reflect now and decide, what are you: Greedy Monkey, Thrifty Squirrel, Hungry Hound or the Astute Dolphin?……………
P.S: The idea was taken from an article read long ago. I do wish to acknowledge the source but can't remember.
