All That Matters: The Sins and Virtues of Investing
Investing well starts with behavior, but knowing which behaviors to avoid and which to embrace is not always easy. In this episode of All That Matters, Mike and Ross explore the “sins” that can lead investors astray, the “virtues” that can help them stay grounded and why election uncertainty shouldn’t distract from a long-term plan.
Mike: Welcome to All That Matters with Mike and Ross. I’m excited about this episode because it focuses a little bit on my work. Ross produces incredible work, and as a team, we’re the data and behavior duo. This month, we’re going to focus on a couple of blogs I wrote and, at the end of the episode, relate them to the elections. The two blogs are called The Seven Sins of Investing and The Seven Virtues of Investing. You know us. We always preach that behavior matters. Behavior is how you become a good investor. But then people will ask, “What does that mean? What behaviors are we talking about?” There are millions of behaviors. That’s why I wrote the seven sins and the seven virtues. You can read them side by side and say, “I don’t want to do these things. I want to do more of these.” We’re going to start with a couple of the sins and then talk about a couple of the virtues.
The 7 Sins
Mike: The sin from my original list I want to talk about is number six: listening to the wrong people. Nobody knows you better than you know yourself, and nobody knows your financial situation better than your Financial Advisor. The two of you, along with the whole team, work together to successfully navigate the world and reach your goals. Your friend at the club who says the stock market is a bubble or a hedge fund manager who says the U.S. is going to default and this is a terrible time to invest knows nothing about you. They also have no idea what the future holds. They’re guessing, just like everybody else in the world. If you listen to people who don’t know you, your plan or how you think about the world, that is a sin of investing. I don’t want you to fall into the trap of thinking that everybody you speak to has valid information for you because you can quickly become overwhelmed.
Ross: That’s especially true in the media ecosystem we’re in, where there are so many voices all the time. There are two types of wrong people to listen to, at least through that lens. The first is someone who is stoking anxiety on purpose. Negativity drives clicks, and we know that very well from our work. That’s simply the wrong type of person. The other may have good intentions but is speaking to a completely different time horizon than yours. That’s another one of the sins you wrote about: focusing on the wrong time horizon. A hedge fund manager could be a great hedge fund manager and a very nice person with the best intentions, but they may be talking about their view of the world over the next 24 hours, week, month or year. If you’re investing for long-term goals, your time horizon may be 10, 15, 30 or 50 years, or even generational wealth. You’re talking about different things and thinking about the world in different ways because entirely different things matter to the stock market over different time horizons. The other question at the core of investing is: “Where are we putting our money, and what is the purpose or goal behind it?” We talk about the stock market a lot. It’s an incredible wealth creator and has been over the last 100 to 150 years. But if you need your money within the next six or 12 months, the stock market is probably not the best place for it because part of the risk is that it can go down. The stock market has been cut in half over several different 12-month periods. Getting the time horizon right, aligning it with your plan and goals, and making sure the people you hear out in the wild are at least speaking to that same time horizon is so important. It’s a major sin, and we see it all the time through the things that hit our inbox and in conversations with clients. That’s the devil on your shoulder. Now let’s talk about the angel on your shoulder because there are also virtues we want people to aspire to.
The 7 Virtues
Mike: Let’s talk about number three: accepting uncertainty as the default setting of the world. The best investors accept that anything can happen and that the world is a crazy place. No matter what they do, they can’t control interest rates, wars or elections. They accept that while the world is chaotic and uncertain, they can still succeed in it. That’s a virtue. That’s what we want you to do. We want you to say, “I’m going to vote. I’m excited about expressing my view in an election, but I also understand that there is a lot outside my control.” Uncertainty is simply how we have to navigate the world. I tell this to our interns and young investors all the time: Accept that you don’t know what’s going to happen. That doesn’t stop you from succeeding or investing in the best companies.
Ross: The best companies are the ones that are able to capitalize on uncertainty and turn it into opportunity. Some of the best companies in the world were founded during recessions, including Microsoft, Airbnb, Uber and Disney. Those are just a few of the many companies founded during recessions because our system creates an economic incentive to solve problems and work to make the world a better place. The world feels louder than ever. It isn’t necessarily more uncertain than it used to be, but that uncertainty is more in our faces, which makes it difficult. That’s why the best investors today are able to tune some of it out and accept uncertainty as the state of the world.
Keeping the Midterms in Perspective
Ross: You mentioned elections, and that’s relevant to another virtue you outlined in the piece: The best investors don’t let politics inform their investment decisions. We want people to vote. Elections matter, and we hear that the anxiety surrounding them is palpable. These times can be difficult. But as the data guy, I have two statistics to help put that anxiety in perspective. First, the stock market has produced positive returns under every combination of government. Mixed or unified, Democrat or Republican, you can go back 100 years. We have a chart that we use every election cycle, and it hasn’t changed. Yet every two years or so, these concerns come back up.
Second, the market is always looking forward. We’re almost to the midterm election, so much of that uncertainty has already been priced into the market. And here’s a powerful statistic: The market hasn’t gone down in the 12 months following a midterm election since 1938. As we always say, we don’t want to jinx it, but that’s powerful. That’s the data side of it. If politics isn’t what investors should focus on, what should they focus on?
Mike: Every two years, Ross and I climb the same mountain: How do we help people get through the uncertainty and fear surrounding an election? We like doing it. We want you to feel that you can come to us and your Financial Advisor to get what you need to navigate it. What we’re trying to do right now is remind you that the best investors don’t let politics interfere because they understand that what drives their accounts higher is American innovation. At their core, they understand that what makes stocks go up are companies, products, services and profits. Right now, the stock market is being driven by artificial intelligence, a massive and potentially world-changing invention. We’re spending more on it than we did on the railroads in the 1800s, and it’s helping drive the stock market higher. I want to remind you that this investment will continue regardless of the outcome of the midterm elections. Companies are still going to build Claude and OpenAI. They’re still going to buy chips, memory and graphics cards. That will continue regardless of the outcome of the next election. That’s what I want you to focus on. American innovation continues. The iPhone, electricity, the airplane and the microchip all created value through the elections we’ve had. The iPhone came out in 2007 and has created trillions of dollars in value. Think about how many elections we’ve had since then. Remember the sins and the virtues. Read them, digest them, and spend time with your Financial Advisor and your family discussing them. How can we avoid the sins? How can we embrace the virtues? Your Baird Financial Advisor team is here to help keep you on track.
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