Wednesday 7 September 2016

Lessons from Charlie Munger-XVI

Jan 18, 2013


In the previous article, we discussed the importance of use-it-or-lose-it tendency for investors. Today we shall discuss another psychological tendency which is pertinent to investors of all age groups.


Senescence-misinfluence tendency

The word 'senescence' may not seem familiar. It derives its roots from the Latin word 'senescere' which means 'to grow old'. So effectively, senescence-misinfluence refers to the cognitive decay and mental limitations on account of biological aging. Of course, the aging process may differ from person to person in terms of the time it commences and the pace at which it progresses. But, by and large, old people have difficulty acquiring new skills. As such, the probability of learning complex new skills is practically zilch. 

But here is an interesting twist. Though acquiring new skills may be challenging, the good news is that some people very well manage to retain old skills that they have practiced intensely over the years. In fact, there is a long list of people who have achieved great feats despite their old age. Benjamin Franklin, who has been Charlie Munger's personal hero, helped frame the US Constitution at the age of 81 years. At the age of 76 years and 340 days, a Nepalese gentleman by the name of Min Bahadur Sherchan became the oldest person to climb Mount Everest, the world's tallest mountain. Age did not hinder the famous deafblind American author and political activist from writing a book called 'Teacher' at the age of 73 years. Across the world and across fields there is long list of such achievers who have seldom let old age get in their way.

What does senescence-misinfluence tendency have to do with investing?

You may be wondering why we are discussing old age in the context of investing. Let us explain a bit and you will see the connection.

Our financial needs change with the various phases of our life. Given that the topic under discussion concerns old age, let us focus on a person's financial needs post retirement. At this age, you may not have the burden of educating and marrying your kids. You may also not have to worry about buying a home. With all major investments and expenses behind you, you may be relatively relieved.

But you may have several other expenses. For instance, your healthcare expenses could be significantly higher. You may also want to fulfil all the dreams that you may have sacrificed in your youth. And so on. The point is that you are going to need a good deal of money irrespective of your age. 
But would your pension income be enough to take care of your post-retirement needs? And wouldn't you want to avoid depending on your kids for money? At an age when you may not be in the best physical frame to travel distances and perform demanding tasks, what could you do for an alternative source of income? The answer is investing. 

Some may counter with the usual argument that investing in stocks is risky. Of course, there is no denying that there is an inherent risk. But the real risk of significant losses lies in speculative short-term trading. If you choose the path of long term value investing, you will not only live with minimal risk, but the chances of immense profits will be significantly high. Remember, in the long run, equities tend to outperform all major asset classes

But it would be a big mistake if you wait until retirement to start investing actively. The preparation has to start much earlier. When you are relatively young, invest time regularly to educate yourself about value investing. Let this be a life-long process of learning and investing. In this way, you will be very well-equipped to deal with your investments in your latter years.

But wouldn't old age hinder your thinking abilities and decision making? Your greatest inspirations could be Warren Buffett (82 years) and his so-called Siamese twin Charlie Munger (89 years). What is the secret behind their outstanding thinking prowess and investing acumen even at this age? The answer is simple. If you develop useful skills early in your life and practice them rigorously over the years, you could manage to retain those skills for a much longer period, despite the aging process. 

We will continue to discuss some more thinking errors and psychological tendencies that can affect your investment decisions in the subsequent articles of this series. 


https://www.equitymaster.com/detail.asp?date=01/18/2013&story=5&title=Lessons-from-Charlie-Munger-XVI

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