Today’s column is going to wax a bit philosophical. Stay with me, its worth your effort.
You do not really understand Time. By “you” I mean you humans, and by “Time,” I refer to the abstract concept within which all human (excepting Billy Pilgram) structure events in a formal sequence.
This has significant ramifications for investors. You misperceive Time, are seemingly unaware of its importance, and cannot conceptualize its duration over the long term. Pardon the circularity, but you exist in the here and now, and are – for want of a better phrase – stuck in the short term.
The past is a hazy set of fallible memories, biochemical impulses, often tinted warm by the rosy glow of nostalgia. The past can also be darker, traumatic, painful, repressed, still haunting its survivors. Both experiences, often a mix of each, colors the subsequent perspective of its bystanders.
Hence, our prior experiences through Time affect our expectations for what the future experiences will be like. One does not need much imagination to foresee the ramifications the past has for investors. Too many good experiences, or too many bad ones will change the expectations and risk tolerances for those who put capital to work in risk assets.
When considering the future, it is important to recognize it is merely one hypothetical possibility out of an infinite set of possible outcomes, unknown and unknowable. It remains out of reach, sometimes just barely. Some think they understand what will happen in the future, and we divide these “seers” into two groups. The largest group consists of much of humanity, and these are the ones best described as delusional. Evidence and experience – and of course their own published forecasts – teaches us these folks haven’t the slightest idea of what may occur, much less what will occur in the future. Pick any subject at all, and as we have shown too many Times to reiterate here, we have no idea what will occur. None whatsoever. Those of you who believe you do know what will happen, please contact me directly so I may disabuse you of all your childish fantasies.
There is a very tiny percentage of seers who actually can make out, through the haze of the present, a somewhat clear future no one else seems to be able to see. They discern overlooked hints of a significant future event or a societal shift missed by the masses of the delusional. Sometimes, it is merely as simple as (luckily) spotting an underestimated probability that turns out to actually happen. The rarest of birds simply manufacture the future according to their own visionary beliefs for how things should be.
All of which brings us back to investors. It is of the utmost importance to your success in this space to understand the intersection in Time in which you stand. As stated earlier, you exist in the here and now. At that junction, Time colors past experiences and fools you into imagining you know what happens next. This is rather important, as so many investment decisions are made though each of these error-filled lenses.
What makes Time an enigma for investors is an inability to understand how relative the experience of Time actually is. The phrase “The days are long but the decades are short” does a masterful job revealing the subjective experience that Time is. We see this in investors who have an inability to do less, to let time work for them, to just “be.” Some call it a lack of patience, but I see it as more fundamental cognitive issue, an illusion of consciousness that creates problems of temporal understanding.
As you might imagine, the consequences of misunderstanding this are severe.
Humans have difficulty simply being a client that lets Time work as an agent on their behalf. Perhaps their own mortality is why they treat time as an enemy, rather than as an ally. Perhaps it is the way time is experienced. Regardless, it seems that only mathematicians have found an investor’s appreciation of time, via their understanding of the power of compounding. Some people understand it intellectually, but few truly grok it emotionally.
Those who understand what the past can teach have a better grasp of what the future may be. With capital at risk, it is crucial to understand this in the flower of all its ramifications.
The future is a set of statistical possibilities, and to the astute, a set of higher probability outcomes.
Thanks for the article. My “take-away” from this is to pay attention to the statistics. Although no one can know the future, you can still make money by betting aganst people who ignore probability. For example: People are still buying buildings in low-lying areas of Miami.
Within the useful life of these buildings, scientists estimate 24 to 50 “flood days” per year. Although the scientists cannot know the future, their assessment of probability is quite a bit different than the people buying these buildings.
In many such transactions, there is a “winner” and a “loser”. My guess is if there are just four floods per year in the next five years, the “winner” wil be the person who sold the property.
“I am Warren Buffet!”
– Someone who is not Warren Buffet
Death is not an event in life: we do not live to experience death. If we take eternity to mean not infinite temporal duration but timelessness, then eternal life belongs to those who live in the present. Our life has no end in the way in which our visual field has no limits.”
— Wittgenstein, Tractatus, 6.431
Barry,
First of all, thanks for bringing in Vonnegut as a reference. Currently re-reading Mother Night.
Secondly, may I bring up another 60’s cultural reference:
“Go ahead, go ahead and light up the town
And baby, do everything your heart desires
Remember, I’ll always be around…..
Time is on my side”
As spoken and sung by M. Jagger
And so it goes…
Philosopher, Investor, or psychologist one can never tell with Mr. Ritholtz. Nevertheless always a captivating read.
Barry: This is a beautifully written piece about time and investing. My key takeaway from your post is that great investors let time work for their investments irrespective of past experiences. I’m in the process of learning this now, the hard way, sadly! But, to add a little musical color to your piece much like a previous poster did, here’s another great 60’s psychedelic song about the importance of time:
“Now the time has come
There are things to realize
Time has come today
Time has come today
Time…Time…Time”
The Chambers Brothers
The Time Has Come