The Millionaire Tramp

Published in Investing on 31 March 2010

Through investing, even a tramp can become a millionaire...

Earlier this week, news emerged of a remarkable man who managed to amass a sizeable fortune while living rough.  

Curt Degerman, from the Swedish town of Skellefteå, died of a heart attack 18 months ago at the age of 60. Local people knew Degerman as a tramp that scraped together a living by collecting scrap metal and food and drink cans for recycling. For 40 years, he lived a solitary existence, rummaging through bins for recyclables and eating leftovers from fast-food restaurants.

However, after his death, it emerged that "Tin Can Curt" was an avid reader of the financial pages and an astute investor. By reading Dagens Industri -- the Swedish equivalent of the Financial Times -- in his local library, Degerman invested his collected deposits carefully. On his death, his fortune was estimated at more than £1.1 million.

A predictable family feud

Somewhat inevitably, news of Degerman's secret wealth sparked a family feud among his relatives. Degerman's Will left his estate to a cousin who visited him often. However, another cousin contested the Will on the basis that his father, Degerman's uncle, was the legal heir.

A Swedish judge urged the feuding heirs not to waste their money on legal fees and, instead, reach a private arrangement, which they have now done.

What's in a tramp's portfolio?

Apparently, Degerman was an academic child, but dropped out of education and mainstream society in his late teens following personal problems. So, how had he invested his money -- and what can we learn from him?

Degerman clearly knew that investing in businesses produces the best long-term returns, as the majority of his portfolio was in stock market-listed companies. Also, he knew about tax planning, because his share portfolio (worth £731,000) was held in a Swiss bank account. Degerman also saw gold as a shrewd investment: his safety-deposit box held 124 gold bars worth £250,000.

Despite never spending any money, Degerman also had £4,300 in his current account and a further £275 of spare cash at home. Thus, despite not needing any cash, he kept some liquidity at hand, perhaps to fund his next share purchase?

Other wiser misers

To me, this is a familiar tale of a wiser miser; who amasses considerable wealth but has no interest in spending it. Similar stories of eccentric millionaires emerge frequently, often revealed by a generous charitable donation on death.

The story of "Tin Can Curt" Degerman is a fascinating and extreme case study that reinforces the core principles of wealth-building, while also offering some profound and cautionary lessons.

The Expansion: Unpacking the Paradox

Curt Degerman is a walking paradox, and that's what makes his story so compelling. He embodied two contradictory identities:

1. The Public Persona: "Tin Can Curt"

   • Lifestyle: A homeless tramp, living a solitary existence for 40 years.

   • Income Source: Scrounging for scrap metal and cans, the most marginal of incomes.

   • Appearance: The definition of poverty.

2. The Private Reality: The Astute Investor

   • Mindset: An "academic child" who applied his intellect to the financial markets.

   • Habits: A disciplined reader of the financial press (Sweden's Financial Times), implying deep research and a long-term perspective.

   • Strategy: A sophisticated, globally-diversified portfolio of stocks, gold, and cash, held in a Swiss bank account for tax efficiency.

This paradox shatters our conventional assumptions about wealth. It proves that wealth is not a product of your income, your appearance, or your social status. It is a product of your behavior, mindset, and financial system.

---

The Elaboration: The "How" Behind the Fortune

Let's break down the brilliant, albeit extreme, financial system Degerman built:

1. Extreme Savings Rate: This is the foundation. He lived on virtually nothing. Every single krona he earned from collecting cans was potential investment capital. His savings rate was likely close to 100%. This demonstrates a universal truth: Wealth is created in the gap between your income and your spending.

2. Financial Literacy & Self-Education: He didn't have a finance degree. He educated himself for free in the library. He understood that to grow money, you must first grow your knowledge. His choice of reading material—a serious financial newspaper—shows he was focused on business fundamentals, not get-rich-quick schemes.

3. Strategic Asset Allocation:

   • Equities (Stocks): The core of his portfolio (£731,000). He knew that owning pieces of profitable businesses is the best path to long-term wealth creation. This is the exact same principle as Anne Scheiber and Warren Buffett.

   • Gold (£250,000): A classic store of value and a hedge against inflation and systemic risk. This shows he wasn't naive; he understood the need for prudent diversification and preserving wealth.

   • Cash (£4,575): Maintaining liquidity. This is a sophisticated touch. He had "dry powder" ready to deploy when new investment opportunities arose.

4. Tax Efficiency (Swiss Bank Account): This reveals an advanced level of financial acumen. He understood that taxes are one of the biggest wealth destroyers over time, and he structured his holdings to minimize their impact.

---

The Lessons We Can Learn (And What to Avoid)

This story is a goldmine of lessons, but it's crucial to separate the universally applicable principles from the extreme, and arguably tragic, behaviors.

The Positive, Actionable Lessons:

1. Wealth is What You Don't See. It's the unspent money, the reinvested dividends, the quietly compounding assets. You cannot judge someone's net worth by their lifestyle. This should free you from lifestyle inflation and the pressure to "keep up with the Joneses."

2. Your Most Powerful Investment is Your Education. Degerman proved that you can become a sophisticated investor with a library card and discipline. Commit to lifelong learning about finance and investing. It has the highest return on investment of anything you will ever do.

3. A Simple, Disciplined System Trumps a High Income. You don't need a six-figure salary. You need a system where you consistently spend less than you earn and automatically invest the difference. Consistency and time are more important than the amount.

4. Diversify and Think Long-Term. His portfolio wasn't a bet on one stock. It was a balanced, long-term strategy involving growth (stocks), safety (gold), and liquidity (cash). This is a classic, time-tested approach.

The Cautionary Lessons (What Not to Do):

1. Wealth is a Tool, Not a Trophy. The ultimate lesson from Degerman, Scheiber, and even Buffett is that hoarding money for its own sake is a hollow victory. Buffett and Scheiber used their wealth for massive philanthropy. Degerman's wealth only sparked a family feud. The purpose of building wealth is to secure freedom and options, and to ultimately use it for a purpose you value. Life is to be lived, not just endured for a financial score.

2. Find a Balance. You do not need to live in misery to achieve financial independence. The goal is to find a balance between enjoying your life today and securing your future tomorrow. Cut unnecessary expenses, but don't cut out all joy. As the article wisely advises, "I don't recommend taking this to extremes."

3. Your "Internal Scorecard" Matters. This is the core Buffett lesson. Are you building wealth to impress others (external scorecard) or to live by your own values and achieve security and freedom for yourself and your loved ones (internal scorecard)? Degerman's life suggests he may have lost sight of this, becoming a prisoner to his own system.

The Final Summary

Curt Degerman's story is a powerful, double-edged sword. It brilliantly demonstrates that anyone, from any walk of life, can build wealth through extreme discipline, self-education, and a long-term investment strategy. He mastered the mechanics of wealth creation.

However, it also serves as a stark warning that wealth without a purpose is meaningless. The true goal is not just to build a fortune, but to live a rich life—one that includes security, freedom, relationships, and the ability to use your wealth for things that matter to you.

Learn from his incredible financial discipline, but also learn from his life. Build your wealth, but remember to live.

Ann Scheiber: Her legacy teaches us that the most powerful financial force available to anyone is time combined with compound interest.

The Story of Anne Scheiber.  

She retired to invest for another 50 years. Her time horizon was her single greatest asset.

In his book The 21 Irrefutable Laws of Leadership, John Maxwell says that becoming a leader is a lot like investing successfully in the stock market. If you hope to make a fortune in a day, you won’t be successful. What matters most is what you do day by day over the long haul. This, he terms as The Law of Process.

Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!

How did a public service worker with minimal salary accumulate such a staggering wealth? Here’s Maxwell’s take on it:

“By the time she retired from the IRS in 1943, Anne Scheiber had managed to save $5,000. She invested that money in stocks. By 1950 she had made enough profit to buy 1,000 shares of Schering-Plough Corporation stock, then valued at $10,000. And she held on to that stock, letting its value build.

Today those original shares have split enough times to produce 128,000 shares, worth $7.5 million.

The secret to Scheiber’s success was that she spent most of her life building her worth… When she earned dividends – which kept getting larger and larger – she reinvested them. She spent her whole lifetime building…. When it came to finances, Scheiber understood and applied the Law of Process.”

Anne Scheiber's story is not just about investing; it's a parable of transformation, discipline, and the astonishing power of a single, well-executed idea over time. Let's expand and extract the profound lessons.

The Expansion: Unpacking the "Miracle"

Anne Scheiber's journey seems like a fairy tale, but it was built on a bedrock of mathematical certainty and relentless discipline. The provided table is the key to understanding it.

The Retrospective View: How $22,000 Became $22 Million

The table shows her wealth doubling roughly every 5 years. This is the Rule of 72 in action (72 / 15% ≈ 5 years). Let's look at it prospectively to see the journey:

• Age 51 (1943): She starts with $22,000 (from her $5,000 savings + growth by 1950). This is a modest nest egg, even for that time.

• Age 66 (1958): Her portfolio reaches $175,000. This is a solid achievement, but not life-changing for a 15-year effort.

• Age 76 (1968): It grows to $700,000. Now, it's significant. Many people would have been tempted to "cash out" and live comfortably.

• Age 86 (1978): It balloons to $2.75 million. This is where compounding begins to accelerate dramatically.

• Age 101 (1995): It explodes to $22 million.

The critical insight is the "hockey stick" curve. For the first 15-25 years, the growth feels linear and slow. But after that, the line curves almost vertically. Most people give up during the slow, linear phase. Scheiber did not.

---

The Elaboration: The Four Pillars of Her Success

Her strategy wasn't complex, but her execution was flawless. It rested on four pillars:

1. Fierce Frugality & High Savings Rate: She lived on her pension and social security, never touching her investment portfolio or the dividends it generated. Her extreme frugality (the same clothes, free food at meetings) wasn't misery; it was a strategic choice to fuel her compounding engine. Every dollar spent was a dollar that couldn't compound for another 50 years.

2. Focused, Quality Investing: She wasn't a day trader. She was a business owner. She bought shares in high-quality, brand-name companies (Schering-Plough, Coca-Cola, PepsiCo, Bristol-Myers) with durable competitive advantages. She then held them through thick and thin, allowing the underlying businesses to grow and her shares to split over and over. Her 1,000 shares of Schering-Plough becoming 128,000 shares worth $7.5 million is a perfect example of this.

3. The Reinvestment Engine: This is the non-negotiable secret. Spending dividends is the arch-enemy of compounding. By relentlessly reinvesting every single dividend, she was constantly buying more shares, which would then generate their own dividends, creating a self-perpetuating wealth machine. This is the "snowball" effect in its purest form.

4. The Long-Term Mindset (The "50-Year Plan"): This is the most important pillar. Most investors think in terms of quarters or years. Anne Scheiber thought in terms of decades. She wasn't investing until retirement; she retired to invest for another 50 years. Her time horizon was her single greatest asset.

---

The Lessons We Can Learn (And Apply)

You don't need to be as extreme as Scheiber, but the principles are universal.

Lesson 1: It's Not About Your Salary, It's About Your System.

Scheiber was a low-paid, undervalued civil servant. She proved that a massive income is not a prerequisite for massive wealth. What matters is your system: Spend less than you earn, save the difference, and invest it wisely. Your financial destiny is determined by your system, not your salary.

Lesson 2: Start with What You Have, No Matter How Small.

Feeling behind at 50? Scheiber was "only" at $88,000 at 61. The lesson is: It is never, ever too late to start. A 60-year-old with a 30-year horizon has a powerful compounding period ahead. The best time to plant a tree was 20 years ago. The second-best time is today.

Lesson 3: Be an Owner, Not a Speculator.

She didn't trade stocks; she owned pieces of wonderful businesses and held onto them for life. This mindset eliminates the noise and panic of market fluctuations. Your job is to find good companies and be a silent partner, letting the management team work to grow the business year after year.

Lesson 4: Your Dividends Are Your Army of Workers.

View every dividend not as cash to spend, but as a new soldier enlisted to work for you. These soldiers go out, buy more shares (your new "recruits"), and the cycle continues. The bigger your army grows, the faster it can conquer new territory (compound).

Lesson 5: Extreme Patience is a Superpower.

The financial media celebrates quick wins and rapid gains. Scheiber's story is a powerful antidote to this. True wealth is quiet, boring, and built in the background. It requires the patience to watch your sapling grow for 50 years without digging it up to check on the roots. This patience is what 99% of investors lack.

The Final Summary

Anne Scheiber's story demystifies wealth creation. It shows that genius-level intelligence or insider information is not required. What is required is a simple, disciplined strategy executed with monk-like consistency over a period of time that most people find unimaginable.

Her legacy teaches us that the most powerful financial force available to anyone is time combined with compound interest. You control the discipline and the time horizon. Harness them, and you harness the same power that turned $22,000 into $22 million.

Warren Buffett's snowball. The story of his wealth accumulation.

The story of Warren Buffett's wealth accumulation is perhaps the most powerful real-world case study ever on the power of long-term compounding. Let's expand, elaborate, and extract the crucial lessons.

The Expansion: Breaking Down Buffett's Wealth Timeline

The data you provided paints a stunning picture. Let's visualize it on a timeline to make the compounding effect undeniable.

The Elaboration: Why This Happened

The chart reveals a seemingly paradoxical truth: His highest rate of return came between 50-60, but the vast majority of his absolute wealth was built after 60, even with a lower rate of return. This is the essence of compounding.

1. The Snowball Effect: Imagine Buffett's portfolio as a snowball.

   • At 50, his snowball was already massive—$300 million. Rolling it down the hill for the next decade at a blistering 25.89% pace made it huge ($3 billion).

   • At 60, the snowball was now a boulder. Even though the hill was less steep (13.29% return), the sheer size of the boulder meant that each percentage point of growth represented an astronomical sum of money.

   • 13.29% of $3 billion ($399 million) is more than the entire snowball he started with at age 50 ($300 million). This is the secret. The growth is no longer just on his initial capital; it's on decades of accumulated earnings.

2. The Power of the Base: The most critical asset Warren Buffett ever built was not a specific stock—it was his base of capital. Every year, the base gets larger, and the subsequent growth, even at a "modest" rate, becomes mind-boggling in absolute terms.

---

The Lessons We Can Learn

This history is not just about a billionaire; it's a masterclass in personal finance for everyone.

Lesson 1: The Most Important Variable is TIME, Not Timing

You don't need to be a genius who picks the absolute bottom of the market. You need to be a disciplined saver and investor who stays in the market for a long, long time. Buffett's skill generated alpha, but time generated the $57 billion. The first decade of your investing life is about building the base; the following decades are about watching it transform.

Lesson 2: Consistency Trumps Brilliance

This is what Charlie Munger meant. You don't need to double your money every year. You just need to be "a little bit wiser"—making prudent decisions, avoiding major losses, and consistently earning a solid return on average, for a long, long time. A steady 10-15% over 50 years will make you incredibly wealthy. Volatile 50% gains and 40% losses will not.

Lesson 3: Your 50s and 60s Are Not The Finish Line—They're The Launching Pad

This is the most motivating lesson for those who feel they are "behind." If you are 50 and have built a solid nest egg (your "$300 million"), the most powerful growth may still be ahead of you. The period from 60 to 90 is 30 years—a full extra compounding cycle! Do not shift your entire portfolio to ultra-conservative investments the day you retire if you have a 30-40 year time horizon.

Lesson 4: Let Your Winners Run

Buffett's strategy is to "buy and hold forever." He doesn't cash out his gains; he reinvests them. This is the engine of compounding. Spending your investment returns is like harvesting a fruit tree and then cutting it down for firewood. To let the tree grow and provide more fruit every year, you must leave the principal and the dividends to compound.

Lesson 5: The Rate of Return Matters, But So Does the Scale

Early on, focus on growing your rate of return through smart investing. Later, as your capital base grows, the relentless focus should be on preserving capital and earning a good, consistent return. A 15% return on $10,000 is $1,500. A 10% return on $1,000,000 is $100,000. As your base grows, the absolute gains become life-changing, even with a lower rate.

The Final Summary

Warren Buffett's story proves that compounding is not a linear process; it's an exponential one. The first few decades build the foundation, but the final decades create the true fortune. The lessons are clear:

• Start as early as you possibly can.

• Be consistent and disciplined.

• Think in terms of decades, not years.

• Protect your capital and let your winners compound.

You may not become the next Warren Buffett, but by applying these same principles of patience and long-term thinking, you can harness the very same mathematical force that built his wealth. Your goal is not to replicate his $60 billion, but to replicate his 70-year time horizon.

The Biggest Enemy in Investing is Yourself

 

Behavioural Finance - The Biggest Enemy in Investing is Yourself

Your opening statement is the core truth of behavioural finance. While we often look for external villains—volatile markets, economic downturns, bad advice—the most significant source of investment error is our own ingrained psychological biases.

---

1. The Core Conflict: Man vs. "Rational Economic Man"

• Traditional Finance (The "Rational" Model): This is the old paradigm. It assumes that investors are "rational actors" who:

  • Process all available information logically and without emotion.

  • Make decisions solely to maximize their wealth (utility).

  • Are consistent in their risk tolerance.

  • This model is elegant and forms the basis of theories like the Efficient Market Hypothesis (EMH), but it's a poor description of how people actually behave.

• Behavioural Finance (The "Realistic" Model): Pioneered by psychologists Daniel Kahneman and Amos Tversky (Nobel Prize, 2002), this field acknowledges that investors are "normal," not always rational. They are:

  • Influenced by emotions (fear, greed, regret).

  • Use mental shortcuts (heuristics) that often lead to errors.

  • Systematically prone to cognitive biases that distort judgment.

The central insight is that these irrational behaviors are not random; they are predictable and systematic. By understanding them, we can defend against them.

---

2. Deep Dive: Recency Bias (The Party Effect)

Your notes provide a perfect case study. Let's break down the "Party Effect" and its implications.

What it is: Recency Bias is the tendency to weigh recent events more heavily than earlier ones when making decisions. Our brains are wired to believe that what happened yesterday will continue to happen tomorrow.

The Party Analysis - Why It's So Powerful:

The example of the four guests is brilliant because it shows that the exact same investment (the S&P 500 fund) can produce entirely different realities and emotions for different people, based solely on their entry point.

• Guest 1 (30 months, +12.28%): Has lived through a full cycle. While uncomfortable with the recent downturn, their overall experience is positive. They are likely to stay invested.

• Guest 10 (21 months, +1.36%): Feels frustrated. They missed the big early gains and have seen their profits evaporate. They are on the fence, susceptible to selling on a further dip.

• Guest 19 (12 months, -21.53%): Is in a state of panic and regret. Their entire experience is negative. They believe "the market is a terrible place" and are highly likely to sell to stop the pain, potentially locking in losses at the bottom.

• Guest 25 (6 months, -11.42%): Also panicked, but may hold on slightly longer, hoping to "break even." Their entire perspective is framed by the recent bear market.

The Dangerous Consequences:

1. Buying High, Selling Low: This is the ultimate investor sin, and Recency Bias is its primary driver.

   • During a bull market (everyone is making money), the recent past is positive. Greed and FOMO (Fear Of Missing Out) take over, leading people to buy after prices have already risen significantly.

   • During a bear market (prices are falling), the recent past is negative. Fear and panic set in, leading people to sell after prices have already fallen, crystallizing their losses.

2. The "This Time is Different" Mentality: Recency Bias fuels the belief that current market conditions (a boom or a bust) are a "new normal" and that historical patterns no longer apply. This leads to a abandonment of long-term strategy.

---

3. Other Critical Biases and Heuristics

Beyond Recency Bias, here are other common enemies in the investing psyche:

• Overconfidence: We tend to overestimate our own knowledge, skill, and ability to predict the future. This leads to excessive trading, under-diversification, and ignoring contrary evidence. (Mentioned in the Yale lecture).

• Confirmation Bias: We actively seek out information that confirms our existing beliefs and ignore or dismiss information that contradicts them. An investor who buys a stock will then only read positive news about it.

• Loss Aversion (from Prospect Theory): This is a foundational concept. The pain of losing $100 is psychologically about twice as powerful as the pleasure of gaining $100. This makes us irrationally hold onto losing investments (hoping to avoid realizing the loss) and sell winning investments too early (to "lock in" a gain).

• Anchoring: We rely too heavily on the first piece of information we receive (the "anchor"). For example, an investor might fixate on the high price a stock once reached ($150) and refuse to sell it at $80, even if the fundamentals have deteriorated, because $80 seems "low" compared to the anchor.

• Herd Mentality: The tendency to follow the actions of a large group, even if it's irrational. This drives asset bubbles and crashes.

---

4. How to Fight Your Inner Enemy: A Practical Guide

The notes correctly state that this is the "deadliest of all traps." Overcoming it requires a systematic defense.

1. Educate Yourself: This is the most powerful weapon. You don't need to become a professional trader, but you must understand the fundamental principles of investing (what is a stock? a bond? what is diversification? what is a market cycle?) and, crucially, the principles of behavioural finance itself. Knowing these biases by name allows you to spot them in your own thinking.

2. Create a Rules-Based Plan (An Investment Policy Statement): You must make your crucial decisions when you are thinking clearly, not in the heat of the moment. Your plan should define:

   • Your long-term goals (retirement, a house, etc.).

   • Your asset allocation (what percentage in stocks, bonds, etc.).

   • Clear rules for rebalancing (e.g., "I will rebalance my portfolio back to my target allocation every 12 months").

   • This plan acts as a "circuit breaker" for your emotions.

3. Embrace Dollar-Cost Averaging: This technique, where you invest a fixed amount of money at regular intervals (e.g., monthly), automatically fights Recency Bias. You buy more shares when prices are low and fewer when prices are high, smoothing out your entry point and preventing you from trying to "time the market."

4. Hire the Right Kind of Advisor: The notes are emphatic and correct here.

   • Fiduciary Duty is Non-Negotiable: A fiduciary is legally and ethically obligated to put your interests first. This removes the "conflict of interest" variable. Many advisors at large wirehouses (like those mentioned: Merrill Lynch, etc.) are not held to a fiduciary standard and may be incentivized to sell you products that are good for them.

   • Your Advisor as a "Behavioral Coach": A good fiduciary advisor's greatest value may not be stock-picking, but being the voice of reason when you are panicking or becoming greedy. They help you stick to your plan.

Conclusion

Behavioural Finance doesn't just make us smarter investors; it makes us more self-aware individuals. It teaches us humility, patience, and the value of discipline. The market's volatility is a given. Your reaction to it is the variable you can control. By understanding that your biggest enemy is the collection of biases and emotional reflexes within you, you can build the defenses necessary to achieve long-term success.

In short: Master the market by first mastering yourself.

The Story:  Welcome to the party

When describing the stock market each participant sees their portfolio’s performance from their perspective only and thus they are always “right” which leads to what I call The Party Effect or what Financial Behaviorist call the Recency Bias.

Imagine that you attended a party hosted by your investment advisor and that in addition to you, also in attendance were several other clients. As you go around the room and meet people you learn that everyone at the party owns the exact same S&P 500 index mutual fund. I use the S&P 500 for this tale because by many measures it has historically produce an average rate of return of about 12% and as many people know, and now you know as well, it represents what many investors call “the stock market.” The question then is would everyone have the same rate of return at this party? Of course the answer is, no they would not. If they started at the same time they would but since people invest or come into the life of the investment advisor at different times, the answer is no.

Let’s tighten up the party attendee list and invite only 30 guests. For simplicity, let’s assume that Guest 1 purchased the fund 30 months ago, that Guest 2 purchased it 29 months ago, that Guest 3 purchased it 28 months ago, etc. What would the guests discuss? What would be their perspectives of the stock market?

In order to determine what the guests would discuss and how they would evaluate their performance we need to have some data in the form of monthly rates of return. So we need to develop a monthly rate of return for 30 months to see what they see. Again, for simplicity, assume that for the first 18 months the fund goes up 3% per month and for the next 12 months it goes down 2% per month. Please note that I didn’t pick this sequence of numbers randomly. I have a purpose to this. This particular sequence approximates how the stock market moves in terms of bull and bear market duration and after 30 months returns approximately 12%; 12.28% to be exact. This sequence of numbers is a good sequence to illustrate The Party Effect or Recency Bias. We can characterize the first 18 months as the bull market phase of the 30-month cycle and the last 12 months as the bear market phase of the 30-month cycle.

To illustrate The Party Effect lets focus on 4 guests and see how they describe the stock market. Let’s look at guests 1, 10, 19 and 25. I picked these 4 because readers of this tale can relate in some form or another to one of these 4.

- Guest 1 started 30 months ago, at the beginning of the bull market phase, and his rate of return is 12.28% for the entire 30-month cycle. He enjoyed the ride up for 18 months and now the ride down for the last 12.

-  Guest 10 started 21 months ago, halfway through the bull market phase, and his rate of return is 1.36%    for the 21-month period he has been invested.

-  Guest 19 started 12 months ago, at the beginning of the bear market phase, and his rate of return is  -21.53% for the 12-month period he has been invested.

-  Finally, Guest 25 started 6 months ago, halfway through the bear market phase, and his rate of return is  –11.42 for the 6-month period he has been invested.

These 4 guests experienced entirely different rate of return outcomes and view their portfolios and thus the stock market completely different. All 4 are correct. All 4 are right and yet they couldn’t possibly have more divergent outcomes. If they don’t have a complete picture of the stock market, they can get themselves in trouble. The difference between the best performing portfolio that is up 12.28% and the worst performing portfolio that is down 21.53% is an astounding 33.81%. Is this too obvious? You may say, of course they have different outcomes, they started at different times but that is not the point. The point is that stock market investing will always produce different outcomes. One guest started at the worst time possible. Another guest started at the best possible time. How they look at the past determines how they see the present. Most importantly, it will determine how they will act going forward.

The Party Effect simply states that stock market participants evaluate their portfolio performance based on their perspective and their perspective only. They do not see the market as it is but as they are. Without an expert understanding of how the stock market works, this leads to incorrect conclusions that ultimately lead to incorrect decisions. The field of Behavioral Finance (BF) has shown time and time again that people have variable risk profiles. BF demonstrates that fear is a stronger emotion than greed. This means that in our simple 4 guest example, Guests 3 and 4 are more likely to exit the stock market at just the wrong time since their recent, thus Recency Bias, experience is one of losing money. It means that Guest 1 and 2 are more likely to stay invested, thus catching the next wave up that is likely to follow. All 4 have intellectual access to the events of the last 30 months. All 4 can educate themselves on the stock market. However, their particular situation is so biased by recent events that the facts are unimportant. They behave irrationally. I have witnessed this irrational behavior throughout my career. No one is immune, even advisors.