The emotions of envy hinge on the habit of maximizing the returns in every area of life. Habitual maximisers always have a creeping anxiety about missing something. If you don’t stop at a near-satisfactory solution, it may take you an eternity to reach the smallest conclusion or perform the smallest act.
Lalchand, a new investor decides to pay a visit to the Mecca of Indian stock market – The Dalal Street. As he approaches the BSE building, a big bright glow sign board catches his attention.
“Guaranteed Multibagger Stock Ideas. Free!” The dancing lights around the letters were hypnotic.
His eyes immediately started searching for all too familiar star mark which usually punctuates such claims and leads you to conditions-apply disclaimer. Unable to find it, he gives in to the temptation and enters the building. An attractive receptionist greets Lalchand. She walks him into a spacious office.
Standing behind the large wooden desk was a tall man wearing an expensive black suit and a shiny red tie.
“Welcome, Sir. Please have a seat.” He smiles and points towards a chair as he settles down in his own chair.
Massive bookshelves eclipsed two of the walls and the pictures of many legendary investors were adorning the third wall. Warren Buffett, Benjamin Graham, and Phillip Fisher were right at the center.
“So what’s the deal, Mr…?” The puzzled visitor asks.
“You can call me Mr. Market. And I have a proposal for you,” the guy in the suit starts explaining. “I have five multibagger stock ideas. We’ve done thorough research and checked all our facts. We guarantee that if you incur any losses in our ideas, we’ll cover it. Sounds good?”
“Sounds too good to be true. What’s the catch?
“I understand your concern. So, let me tell you how it works.” He pulled out five envelopes – numbered one to five – and lay them on the desk.
“Each of these envelops contains one stock idea and a gist of it. I’ll open an envelope, starting from number one, and read its contents but I won’t tell you the name of the stock. Based on that information, if you decide to accept that stock tip, I’ll reveal the stock name and you can leave. You won’t get to see the other envelopes. But if you pass on the first idea, I’ll open the next envelope for you and so on. Once you’ve passed on an idea, you can’t go back to it. Shall we start?”
“Okay.” Lalchand nodded.
Mr. Market cracked open the first envelop and started reading, “This one, according to us, will be a two-bagger in next six years. You can double your investment in six years. What do you say?”
“Double in six years means a CAGR of 12%. My mutual fund is already giving me that kind of return. So, pass.” Lalchand blurted.
“Sure.” Mr. Market stashed away the first envelope in his drawer and opened the second one. “Sir, you should be happy that you discarded the first idea because this one will double your investments in 5 years. Great steal, I must say.”
Lalchand ran the rule of 72 in his head and said, “That’s 15% CAGR. Well, I could do better than that just by investing in special situations. I would pass this one also.”
“No Problem. We have three more envelopes to go. Let’s see what’s in the third one.” said Mr. Market as he pulled out a piece of paper from the next envelope.” Looks like it’s your lucky day Mr. Lalchand. This stock will triple your investment in 5 years. That’s a whopping 24% CAGR. Who could say no to that?”
“That’s something. But now I am curious about the remaining envelopes. Maybe another Page Industries or even Eicher Motors is waiting for me.” There was a dash of confidence in Lalchand’s voice.
“As you wish, Sir. So the fourth envelope says that this idea will triple your investments in 3 years. Lady Fortuna is on your side today, Mr. Lalchand.”
“Have you heard of Rain Industries, Mr. Market?” Lalchand’s question came as a surprise. “It was a ten-bagger in less than two years. In my mind, a multibagger looks like that. So toss this one away and show me the last envelope.”
“I hope you haven’t forgotten that you can’t get any of the ideas that you discard.” Mr. Market winked.
“I’ll take my chances. Fifth envelope please!”
Mr. Market rolled his eyes while his hand fished for the paper inside the last envelope.
If you’ve read this far, you would have guessed how this story is going to end, haven’t you? Please allow yours truly to indulge in the pleasure of narrating the climax.
“Here’s what it says,” informed Mr. Market, “You are visitor number 98,699. There is no stock tip here. This envelope exists solely as a proof that investors are never satisfied with any investment idea. Thanks for your time. You can now resume your stroll on Dalal Street.”
Lalchand’s encounter with Mr. Market is mostly fiction, but there are terribly important lessons in it.
You know what Lalchand’s problem is? He is a maximiser. Habitual maximisers always have a creeping anxiety about missing something. When you decide in a maximizing mode, it always leaves you with the dispiriting feeling that you could have made a better decision.
Let me tell you another story. This one is a true story.
In 1983 an upcoming rock band of young musicians landed their first record deal. They signed the contract and were about to start working on their debut record album. But just days before the recording began, the band fired their lead guitarist. No warning, no explanation. They literally woke him up one day and asked him to leave.
But instead of feeling cheated and hurt, the guitarist took it as a challenge. He decided to start his own band and vowed to become so successful that his old band would forever regret their decision. His ambition was fueled by anger and revenge became his life’s purpose. Within a couple of years, his new band had signed a record deal of their own. The guitarist’s name was Dave Mustaine, and the new band he formed was the legendary heavy-metal band Megadeth. Megadeth would go on to sell over 25 million albums. Today, Mustaine is considered one of the most brilliant and influential musicians in the history of heavy-metal music.
In a rare interview in 2003, an emotional Mustaine admitted that his success meant nothing to him. He still considered himself a failure. Why? Because the band he was originally kicked out of was Metallica, which has sold more than 180 million albums worldwide. Metallica is considered the greatest rock bands of all time.
I first read Mustaine’s story in Mark Manson’s unconventional book The Subtle Art of Not Giving a F*ck. Manson writes –
Despite taking a horrible event in his life and making something positive out of it, as Mustaine did with Megadeth, his choice to hold on to Metallica’s success as his life-defining metric continued to hurt him decades later. Despite all the money and the fans and the accolades, he still considered himself a failure. Now, you and I may look at Dave Mustaine’s situation and laugh. Here’s this guy with millions of dollars, hundreds of thousands of adoring fans, a career doing the thing he loves best, and still he’s getting all weepy-eyed that his rockstar buddies from twenty years ago are way more famous than he is.
You know what Dave’s problem was? He too was a maximiser. For him, the measure of success hinged on an external scorecard. His envy made him a maximiser. Even if he had beaten Metallica, he would have soon have found something else to be envious of.
Let me remind you of what Charlie Munger said on this subject –
The idea of caring that someone is making money faster than you are is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley? If you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what? Someone will always be getting richer faster than you. This is not a tragedy.
The antidote for envy and the habit of maximization is an idea called Satisficing.
Herb Simon, a Nobel Laureate and computer scientist, is credited for coining the term. It comes by melding together two words – Satisfy and Suffice. Simon argued that if one started optimizing (or maximizing) at every step in life, then it would cost us an infinite amount of time and energy. In other words, if you don’t stop at a near-satisfactory solution, it may take you an eternity to reach the smallest conclusion or perform the smallest act.
Nassim Taleb, in his book Fooled by Randomness, writes –
Research on happiness shows that those who live under a self-imposed pressure to be optimal in their enjoyment of things suffer a measure of distress. We know that people of happy disposition tend to be of the satisfying kind, with a set idea of what they want in life and an ability to stop on gaining satisfaction. Their goals and desires do not move along with the experiences. They do not tend to experience the internal treadmill effects of constantly trying to improve on their consumption of goods by seeking higher and higher levels of sophistication. In other words, they are neither avaricious nor insatiable. An optimizer, by comparison, is the kind of person who will uproot himself and change his official residence just to reduce his tax bill by a few percentage points. (You would think that entire point of a higher income is to be free to choose where to live; in fact it seems, for these people, wealth causes them to increase their dependence!)
In an uncertain world, there’s is no way to find the best. Even if you got it by accident, you would not know and might still look for something better. The desire for perfect optimization is a direct route to unhappiness.
When you hear the news of investors making outsized returns in special situations, and derivatives and real estate, the 12-15% CAGR on your Mutual Funds look piddly. But think about all the stress that would tag along with those investment strategies which hold the promise of maximizing your investment returns.
How much stress do you want to take for one unit of return on your investment? In a fantastic post on ‘return per unit of stress,’ Prof. Sanjay Bakshi wrote –
…one should also think about measurement of investment returns based on “return per unit of stress” …Stress should figure in one’s investment strategy, much more than it does, perhaps, even more than financial risk, because stress is a killer and high-stress situations – whether they carry high or low investment risk – will always carry a high risk to one’s health. In fact, one can now measure how many years of one’s life is cut short by being exposed to a high-stress life.
Once you start incorporating return per unit of stress in your investment thinking, the trade-offs become obvious. You would start settling for investment situations which offer a satisfactory return per unit of risk and stress over those which offer high returns per unit of financial risk but low returns per unit of stress. You will slow down and start appreciating the slow process of long-term, stress-free compounding as opposed to nerve-wracking, adrenalin laden high-frequency operations in the stock market.
My advice to those who ignore the stress part of the equation but focus only on returns per unit of risk: You cannot take it away with you, so what’s the point of all that stress, just for the money?
So what does a maximizing investor look like? Someone who sells his stocks to optimize the tax outgo. Someone who tries to time the market.
Derek Sivers’ Anything You Want is my favourite book on business. It’s short and to the point. You can finish it in less than one hour. Sivers recounts an interesting conversation he once had with a taxi driver in Las Vegas.
“I was in Las Vegas for a conference, taking a taxi from the airport to the hotel.
I asked the driver, “How long have you lived here?”
“He said, “Twenty-seven years.”
“I asked the driver, “How long have you lived here?”
“He said, “Twenty-seven years.”
“Wow! A lot has changed since then, huh?”
“Yeah. I miss the mob.”
“Huh? Really? What do you mean?”
“When the mafia ran this town, it was fun. There were only two numbers that mattered: how much was coming in, and how much was going out. As long as there was more in than out, everyone was happy. But then the whole town was bought up by these damn corporations full of MBA weasels micro-managing, trying to maximize the profit from every square foot of floor space. Now the place that used to put ketchup on my hotdog tells me it’ll be an extra twenty-five cents for ketchup! It sucked all the fun out of this town! Yeah… I miss the mob.”
I told this story a lot at CD Baby [Sivers’ company].”
“Sometimes MBA types would ask me, “What’s your growth rate? What’s your retained earnings rate as a percentage of gross? What are your projections?”
I’d just say, “I have no idea. I don’t even know what some of that means. I started this as a hobby to help my friends, and that’s the only reason it exists. There’s money in the bank and I’m doing fine, so no worries.”
They’d tell me that if I analyzed the business better, I could maximize profitability.
Then I’d tell them about the taxi driver in Vegas.
Never forget why you’re really doing what you’re doing.
Are you helping people? Are they happy? Are you happy? Are you profitable? Isn’t that enough?”
So dear investor, never forget why you’re investing in the stock market. To preserve your capital against inflation and build wealth over long-term for a comfortable retirement, right? That’s the goal most investors start with but along the way they get caught up in the frenzy of getting rich quickly and forget why they are doing what they are doing.
I’ll wrap up this post with a thought-provoking conversation that a job recruiter had with one of the candidates. I found this piece on social media.
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Years ago, I cold-called a candidate about a new opportunity. It was a big step up from his current role, and he had all the right skills and qualifications.
“Sorry but I’m not interested,” he politely said.
I pressed him on it until he said something that really confused me. He told me that he “already made it to the top.”
I was familiar with his current company and looked at his resume again.
He wasn’t anywhere near the top. He would have needed a telescope to see the top. He wasn’t even a manager yet.
He explained to me that “making it to the top” for him meant he loved the exact work he did each day, he loved his company, he was treated fairly and with respect, he made enough money to be comfortable, he had excellent benefits, he had flexibility, and most importantly to him, he’s never missed a single Little League game, dance recital, parent-teacher conference, anniversary, birthday, or any family event.
He knew what taking the next step in his career meant. More time, travel, and sacrifice. “Not worth it,” he said.
Your definition of “making it to the top” doesn’t have to be society’s or anyone else’s definition. You Do You.
I hope you’ll start thinking more about Satisficing as you invest your money in the stock market.
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