Ulysses ‘BeesWax in Your Ears’ Strategy for Investments
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four bestselling books on Personal Finance.
29 May, 2017
Think about this pattern for a minute.
At the top of the market we can’t buy fast enough.
About three years later at the bottom, we can’t sell fast enough.
And we repeat that pattern over and over until we’re broke.
No wonder most people are unsatisfied with their investing experience.
– Carl Richards (The Behavior Gap)
Recently, our team conducted a market analysis, based on the Sensex data for a period of 35 years, i.e. from January 1st 1980 to 31st December 2015. This led us to one simple conclusion: It’s not about TIMING the market, it’s about TIME IN the market.
Here is the proof of the pudding
Outlined below is a summary of the returns generated by investing Rs. 10,000 p.a. from 1980 to 2015, at different market levels in each year. We took into account the following scenarios;
1. Where one got extremely lucky and invested at the lowest market level of each year.
2. Where one got extremely unlucky and invested at the highest market level of each year.
3. However, it is not possible to get either extremely lucky or unlucky each and every year. Hence, we considered a 3rd scenario; one where disciplined investments were made on a fixed date each year, without considering the market level at that point of time.
As the above image demonstrates, there is hardly any difference in the returns generated by investing at any market level, highest or lowest, on a fixed date, in each respective year. Thus, in the long run, there is no significant benefit in timing the market. With the investment time horizon being long term, any time is a good time to invest.
The problem is in recognizing that, in aggregate, investors tend to be very bad at timing the market. Another problem is that though we recognize this as self-destructive behavior, we will still fall prey to the proverbial ‘Siren Call.’
So, what’s the solution?
Professor Shlomo Benartzi in his famous TED video, ‘Saving for tomorrow, tomorrow’ stated, “Self-control is not a problem in the future. It’s only a problem now when the chocolate is next to us.” He provides a very simple, yet powerful antidote to remedy this age-old behavioral short-coming. He calls upon investors to make an Ulyssesan Contract: a decision made in the present to bind oneself to a particular course of action in the future.
It derives from the strategy that Ulysses adopted on his journey home from the Trojan wars, which took him and his ship’s crew close to the Sirenusian Islands. These islands were famous for being home to the Sirens whose songs were so irresistibly seductive that seamen felt impelled to fling themselves into the waters, in an attempt to reach the Sirens. However, no seaman ever survived and hence, no living human knew the nature of the Sirens’ songs.
Ulysses wanted to be the first human to hear the songs, and survive. He instructed his crew to fill their ears with beeswax, to block out the sound, and then tie him to the mast and to ignore his pleas to be released, should he do so. The plan worked; Ulysses heard the Sirens’ songs, the crewmen ignored his entreaties to be untied and when they were out of earshot, he gave a pre-arranged signal to take out the ear plugs and release him. Ulysses had committed himself to a rational course of action at a neutral time, that is before he could hear the Sirens’ songs, and ensured that he stuck with his decision. This action of pre-commitment is the work of the reflective mind.
Every investor has a lesson to learn from this mythological story. In the same way that Ulysses conquered this known limitation of the human mind, financial advisors should simulate the strategy and invite their clients to engage their reflective minds to pre-commit to a rational investment strategy in advance of movements of the market that might otherwise trigger irrational responses of the intuitive mind.
As Benartzi emphasizes, re-commitment to a rational investment plan is important, because the intuitive impulse to act otherwise is strong.
The Ulysses Strategy in-Action:
- Understanding the sometimes impulsive nature of investment decisions.
- Agreeing upon what action you should take when, for example, the markets move 25 percent up or down.
- Drawing up a commitment memorandum, with both client and advisor as signatories.
Within such a contract, there are two parties; first, the investor (Ulysses) who is committed to not let emotions get the better of him and second, a trusted advisor (the crew with beeswax).
Nothing beats Inaction but ACTION:
Go ahead. Take up this challenge. Draw a Ulysses Contract to yourself and try to stick to it the next time the markets are irrational. I am sure that having taken this step will help you to pre-commit to rational action before the weather gets rough.