Odyssey is an epic ancient Greek poem that is attributed to Homer. It was composed nearly 3,000 years ago, but it can teach us plenty about modern-day investing.
An ancient epic
Odyssey recounts the tale of Odysseus, a Greek hero and king. After fighting for 10 long years in the Trojan War, Odysseus finally gets to go back to his home in Ithaca. Problem is, the way home for Odysseus was fraught with danger.
One treacherous part of the journey saw Odysseus having to sail past Sirenum Scopuli, a group of rocky small islands. They were home to the Sirens, mythical creatures that had the body of birds and the face of women.
The Sirens were deadly for sailors. They played and sang such enchanting melodies that passing sailors would be mesmerised, steer toward Sirenum Scopuli, and inevitably crash their ships.
Odysseus knew about the threat of the Sirens, but he also wanted to experience their beguiling song. So, he came up with a brilliant two-part plan.
The Greek hero knew for sure that he would fall prey to the seductive music of the Sirens – all mortal men would. So for the first part of his plan, he instructed his men to tie him to the ship’s mast and completely ignore all his orders to steer the ship toward Sirenum Scopuli when they approached the islands. For the second part, he had all his men fill their own ears with beeswax. This way, they couldn’t hear anything, and so would not be seduced by the Sirens when the ship was near Sirenum Scopuli.
The plan succeeded, and Odysseus was released by his men after his ship had sailed far beyond the dark reaches of the Sirens’ call.
A modern tragedy
One of the great tragedies of modern-day investing is that we, as investors, are self-sabotaging.
Peter Lynch is one of the true investing greats. During his 13-year tenure with the Fidelity Magellan Fund from 1977 to 1990, he produced an annualised return of 29%, turning every $100,000 invested with him into $2.7 million. But the investors in his fund earned a much lower return. In his book Heads I Win, Tails I Win, Spencer Jakab, a financial journalist with The Wall Street Journal, explained why:
“During his tenure Lynch trounced the market overall and beat it in most years, racking up a 29 percent annualized return. But Lynch himself pointed out a fly in the ointment.
He calculated that the average investor in his fund made only around 7 percent during the same period. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.”
A 7% annual return for 13 years turns $100,000 into merely $241,000. Unfortunately, Lynch’s experience is not an isolated case.
In the decade ended 30 November 2009, CGM Focus Fund was the best-performing stock market fund in the US, with an impressive annual gain of 18.2%. But the fund’s investors lost 11% per year on average, over the same period. CGM Focus Fund’s investors committed the same mistake that Lynch’s investors did: They chased performance, and fled at the first whiff of any temporary trouble.
Two data points don’t make a trend, so let’s consider the broader picture. Investment research outfit Morningstar publishes an annual report named Mind The Gap. The report studies the differences between the returns earned by funds and their investors. In the latest 2019 edition of Mind The Gap, Morningstar found that “the average investor lost 45 basis points to timing over five 10-year periods ended December 2018.”
45 basis points equates to a difference of 0.45%, which is significantly lower than the performance-gaps that Lynch (22% gap) and CGM Focus Fund (29% gap) experienced. But the Morningstar study still highlights the chronic problem of investors under-performing their own funds because of self-sabotaging behaviour.
(If you’re wondering about the distinction between a fund’s return and its investors’ returns, my friends at Dr. Wealth have a great article explaining this.)
Tying the tales together
On his journey home, Odysseus knew he would commit self-sabotaging mistakes, so he came up with a clever plan to save himself from his own actions. The yawning chasm between the returns of Magellan Fund and CGM Focus Fund and their respective investors show that the investors would have been far better off if they had taken Odysseus’s lead.
Having a fantastic ability to analyse the financial markets and find great companies is just one piece of the puzzle – and it’s not even the most important piece. There are two crucial ingredients for investing success.
The first is the ability to stay invested when the going gets tough, temporarily. Even the best long-term winners in the stock market experience sickening declines from time to time. This is why Peter Lynch once said that “in the stock market, the most important organ is the stomach. It’s not the brain.” The second key ingredient is the ability to delay gratification by ignoring the temptation to earn a small gain in order to earn a much higher return in the future. After all, every stock with a 1,000% return first has to jump by 100%, then 200%, then 300%, and so on.
We’re in an age where we’re drowning in information because of the internet. This makes short-term volatility in stock prices similar to the Sirens’ song. The movements – and the constant exposure we have to them – compel us to act, to steer our ship toward the Promised Land by trading actively. Problem is, the Promised Land is Sirenum Scopuli in disguise – active trading destroys our returns. I’ve shared two examples in an earlier article of mine titled 6 Things I’m Certain Will Happen In The Financial Markets In 2020. Here are the relevant excerpts:
“The first is a paper published by finance professors Brad Barber and Terry Odean in 2000. They analysed the trading records of more than 66,000 US households over a five-year period from 1991 to 1996. They found that the most frequent traders generated the lowest returns – and the difference is stark. The average household earned 16.4% per year for the timeframe under study but the active traders only made 11.4% per year.
Second, finance professor Jeremy Siegel discovered something fascinating in the mid-2000s. In an interview with Wharton, Siegel said:
“If you bought the original S&P 500 stocks, and held them until today—simple buy and hold, reinvesting dividends—you outpaced the S&P 500 index itself, which adds about 20 new stocks every year and has added almost 1,000 new stocks since its inception in 1957.”
Doing nothing beats doing something.”
We should all act like Odysseus. We should have a plan to save us from ourselves – and we should commit to the plan. And there’s something fascinating and wonderful about the human mind that can allow us to all be like Odysseus. In his book Incognito: The Secret Lives of the Brain, David Eagleman writes (emphasis is mine):
“This myth [referring to Odysseus’s adventure with the Sirens] highlights the way in which minds can develop a meta-knowledge about how the short- and long-term parties interact. The amazing consequence is that minds can negotiate with different time points of themselves.”
Some of you may think you’re an even greater hero than Odysseus and can march forth in the investing arena without a plan to save you from yourself. Please reconsider! Nobel-prize winning psychologist Daniel Kahneman wrote in his book, Thinking, Fast and Slow:
“The premise of this book is that it is easier to recognize other people’s mistakes than our own.”
My Odysseus-plan
So what would our Odysseus-plans look like? Everyone’s psychological makeup is different, so my plan is not going to be the same as yours. But I’m still going to share mine, simply for it to serve as your inspiration:
- I commit to never allow macro-economic concerns (some of the recent worries are the US-China trade war and the unfortunate Wuhan-virus epidemic) to dominate my investment decision making.
- I commit to focus on the performance of the business behind the ticker and never allow stock price movements to have any heavy influence on my decision to buy or sell a share.
- I commit to invest for the long-term with a holding period that’s measured in years, if not decades.
- I commit to not panic when the stock market inevitably declines from time to time (volatility in the financial markets is a feature, not a bug).
- I commit to diversify smartly and not allow a small basket of stocks to make or break my portfolio.
I can’t tie myself to a ship’s mast, but I can keep my plan within easy visual reach so that I can sail safely toward the real Promised Land each time I find myself getting seduced by the Sirens’ song. If you have your own plan, we would love to hear from you – please share it in the comments section below, or email it to us at thegoodinvestors@gmail.com!
Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.