Investment Metaphor #7: Commuters

May 4

May 4 Investment Metaphor #7: Commuters

This installment in my series on investment metaphors comes courtesy of Scott over at The Deprived Investor. Scott emailed me today with a suggestion for an investment metaphor that he noticed while commuting home from work. He noticed that the surrounding fellow commuters often behave exactly like investors:

"Essentially I was looking at the way some people will switch lanes pretty frequently, moving into whichever lane happens to be moving faster at that particular point in time. Sometimes it works for them, and they get ahead of me. Other times they get over and that lane slows down and I pass them by. Made me think of investors who buy a hot stock but sell it the first time the price drops, and move into another hot stock. Sometimes it works for them, but sometimes the stock rebounds way beyond where it was when they first bought it, and they miss out because they had sold it (or changed lanes)" - Scott from The Deprived Investor

Switching lanes at the hope of getting home from work a little faster is directly analogous to stock chasing in the hopes of making it rich quick. With commuting the downsides to this approach are immediately obvious: one is more likely to get stuck farther up the road, and more accident prone due to careless driving. Yes, the chances for success are there, too, but do the risks really outweigh the rewards? I suppose for some people it does, just as it does for the numerous "investors" who follow the day trading method rather than a long-term investment method.

The risks are just as clear for the flashy (i.e. sexier) day trader: day trading has greater potential for huge returns, but the risks of losing your shirt increase dramatically also when day trading rather than investing. Along with this potential for great returns/losses comes a very high degree of stress. Picture the contrast between the stressed out commuter who is darting in and out of traffic trying to get home and the commuter who is able to kick back, enjoy the tunes on the radio, and get home at a leisurely pace. Who is having the better time? Yes it may take the latter commuter longer to get home, but I'll bet his blood pressure is significantly lower as a result. It reminds me of that old Disney cartoon with Mr. Walker / Mr. Wheeler (see the video above). Likewise, day trading creates an extraordinary amount of stress on a day to day basis, as one is constantly glued to his or her portfolio, often as if hanging on for dear life.

If you check your stocks every day, you’re dumb. Think long-term.

I see this in the personal finance blogs all the time. Those, like I, who are following a long-term buy-and-hold investing strategy have relatively mellow blogs and are content to kick back and let their money make them rich in the long-term. Those bloggers who are day traders admittedly have sexier blogs; and although they may be rejoicing in the here and now when the market is on an upswing, those same rejoicers become nail-biters at the slightest hint of a downward trend in the market.

If you are finding yourself to be a bit too similar to Mr. Wheeler, whether in your driving or in your investing, try slowing down the pace and give long-term investing a try. It may not be as sexy as Mr. Wheeler, but you will have the cool-headed sanity of Mr. Walker in its place, and you will get rich in the long term!

Thanks again to Scott at The Deprived Investor for this investment metaphor.