The Magic (Financial) Pill

The Magic (Financial) Pill

November 07, 2022

A guy walks into the Doctor’s office complaining of back problems.  He says that he has serious pain when he moves around.  After the Doctor runs tests on the gentleman and asks several lifestyle questions, he provides the following observations and recommendations:  Your weight is 375 pounds and your height is 5’9”, you have no exercise program, and you eat deep fried food several times per week.  In addition, you consume alcoholic beverages daily and smoke two packs a day. 

Based on those test results, you will need to start to exercise at least three days per week, adjust your eating habits to a balanced intake, reduce your beverage consumption of alcohol, increase your water intake, and finally stop smoking.  If you follow these steps I’ve recommended, over time, you will see a major improvement in not only your back problems but a prolonging of your life. 

Hearing this, the guy stares at the Doctor for a while and says, “Doc, that sounds nice, but I just came here for my back, can’t you give me a pill to make it go away - you know, like the one on the commercial with the greenish/yellowish color?”

In life – no matter the decision – it is difficult to do what we need to do and easy to do what we want.  However, there is no magic pill.  Not in our health, business, or personal finance.  Although there is a never-ending parade of those that will tell (sell) you everything your heart desires, NOW; explaining how you don’t have to work at it, plan for it, or save up enough to get it later.  Instant gratification (if any doubt, reference back to the housing crisis for just one example) is at your fingertips – just a click away.

Which brings us to the obvious question - why do so many fall victim to the short cuts in life?  More directly for this little essay, financial short cuts.  Although many books are filled with reasons, the fact is that the “long run” benefits are too far off in the distance for the mind to process (there is a study to prove this theory).  Compounding the challenge are the continuous bombardment of commercials, which dangle the instant gratifications in front of us daily.

For example - these snake oil salespersons are still peddling the oil, just of a more modern form.  Only this time, providing charts and software solutions for trading “the market” (for those of you who don’t know what technical analysis is: in terms of predictive credibility, it exists to make voodoo look respectable).  What to own – and when to be in or out of it.  Or never having your portfolio drop when the market crashes but gaining (participating) when the market goes up.

As it pertains to equity investing, if you can’t stomach a temporary dip of about 14%per year – you frankly cannot be a long-term equity investor.  Why? Since 1980, that has been the average intra-year dip (see chart).  There is no magic pill to skirt this historical fact. Period - no snake oil will cure it.  Say it with me, to receive 100% of the long-term increase the markets have provided – we believe you simply need to ride out the inevitable short-term dips. 

The above chart displays the calendar year return in black and the intra-year or “temporary dips” at some point during the year in red.  As you can see, although at some point during the year the market had pulled back, the majority of the time – it ended positive 32 of those 42 years. (Not to pile on the anxiety, but fixed income investors have been facing one of the most challenging years on record.  Equity investors would say, “welcome to the party.”)

Furthermore, whether running a business or planning for your family’s financial future, short cuts - or the magic financial pill - may feel as if they are working for the moment but it has very rarely been a long-term solution.  The adage of “you reap what you sow,” has been around as long as Noah has been looking for tar to caulk his boat.  Why? That’s how it works. That’s how it has always worked. For example, you work hard on your business or investment plan that you have crafted. Every day. You spend less than you earn. Every day.  Over time, you adjust but stick to the plan. Every day.

Thus, when the time finally arrives to sell your business, retire from your job, or provide for your family - you can benefit from what you have sowed.  Not a magic pill, just a planned process of perseverance, delayed gratification and disciplined hard work.

“And that’s all I gotta say about that”- Forrest Gump.

The information is illustrative only and provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
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