"The difference between genius and stupidity is that genius has its limits." -- Anon.
Fairy-tale Hollywood endings, surprise political victories, award ceremonies, and competitive sport events like the Olympics oftentimes lead us to believe that there’s no limit to human achievement. The same applies for personal relationships, where love conquers all, and there’s no mountain too high to climb. All is fair in love and war, we say.
Unconditional love and unconstrained passion help humans find meaning in life and allow us to push through the hardest of trails. However, in the world of Investing, operating by that play-book will get you nowhere. Much like in physics -- where certain laws are unbreakable -- a lack of restraint, not knowing one’s limits, and failing to acknowledge the laws of economics and the humbling power of markets can be disastrous. Unlike love and fame, where emotions tend to overwhelm us and there’s no holding back, successful investment performance is governed by a clear set of factors such as time, risk, and taxes.
So rather than comparing your investment process to creative art forms, competitive sports, or gambling, think of it more like space travel:
· There’s a launch site and a destination;
· There’s a crew that commands the ship, a group of passengers that has signed on for the ride, and a team of experts back at mission control that they heavily rely on;
· There’s a lot of uncharted territory, many things that can (and do) go wrong, and plenty of planning in order to avoid disaster;
· There’s also a lot of “empty time” during which one should avoid anxiety, carry on with his or her daily routine, and let the forces at play do their work.
Just like the force of gravity or the speed of light determine how hard an object falls to the ground or how fast particles can travel through space, investment performance is ruled by certain forces that “limit” or “constrain” how far our money can go. In that sense, investing successfully is more about being realistic, maintaining awareness and remaining calm, than about being hopeful or emotional.
Whether you believe in them or not, some of the major constraints that you’ll inevitably encounter during your “investment voyage” include 1) risk tolerance, 2) time horizon, 3) taxes, 4) liquidity, and 5) unique legal or personal circumstances.
There’s nothing wrong with being optimistic about the future. However, by also being aware of the limits and constraints of your investment returns, you are more likely to enjoy the journey and arrive safe & sound at your ultimate destination.
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