We Don't Bury our Dead

Every investor earns a single return stream for her entire life. We don't think this way, but it is this way.

It's easy to dream forward: how rich can I get? We leap into the future, romanticizing what life might be like when we arrive. But return streams, like life itself, are incremental. Our outcomes are built on billions of previous moments and decisions. Some matter more than others, sure, but it's inescapable...

Everything contributes something.

So flip it. Instead of looking forward, imagine yourself already there. Then look backward onto today. Acknowledge that every decision and outcome leading to that future point — small or large percentages, up and down, luck and skill, fees, optimizations, risks handsomely rewarded or brutishly punished — everything that happens until then, compounds to the result. Sometimes by dollars, and sometimes by millions of dollars.

You might not think this way, but it is this way.

Down to the penny, your current finances are the fossil record of your past decisions. The same can be said of your future finances.

You can ignore it, but you cannot edit it.

Others can have their opinions, but to me excelling at finance requires two specific capabilities:

1. Moving money through time. The ability to project (or discount) values forward (or backward), with both math and intuition.

2. Assessing decision-quality amidst uncertainty. The ability to estimate probabilities, distributions, and the expected shape of likely future outcomes.

Combine those two, and you reach the essence of great investing: making high-quality decisions amidst randomness, with the information you have at the time.

In 1996, Billy Wilder, the famous writer/director (Sunset Boulevard, The Apartment, etc.), sat for an interview with The Paris Review.

Aside from an irreverent get-rich tip at the end, Wilder didn't talk about finance. But he spoke colorfully, as relates to movies, about past decisions that can't be edited. In finance, understanding how past decisions (or non-decisions) impact today's and future values, and the likely or unlikely outcomes from either having made (or not made them) — is everything. It is quite literally how you understand how money moves through our lives, the world, and effectively assess what is random, less random, and non-random...and make better decisions.

It is, per above, what I believe should define a great investor.

In movies, Wilder considered it mostly a pain in the ass.

We don't bury our dead; we keep them around smelling badly.

He was referring to bad movies. Which are recorded, saved, and then (as now) would and could show up on TV years and decades later.

You cannot get rid of a recorded movie. We, the cinema community, don't bury our dead.

And he describes the counter of a crappy movie to be that of a crappy play.

The tragedy of the picture maker, as opposed to the playwright, is that for the playwright the play debuts in Bedford, Massachusetts, and then you take it to Pittsburgh. If it stinks you bury it.

Of course in 1996 this may be truer than the Internet era of now, but he is clear: a playwright can eventually scrape her resume and stop talking about a bad, unrecorded play she wants to go away. But any movie can pop up at 3AM on someone's television anywhere around the world.

Investors don't bury their dead...every trade, fee, panic sale, and lucky break — lives inside this single return stream that has led to your current balance.

It's a sobering and mind-warpy way to think about your money, but we can't avoid that it is this way.

You hopefully do not live a life where financial decisions, poorly made in the past, haunt you now and in the future, even though their remnants do live. Hopefully they were small in magnitude, can be chocked up to randomness, or you have a better stomach to move on. But I know many investors who cannot psychologically move beyond past mistakes.

Decisions made during the volatility of the 2008-09 financial crisis or Covid-19's onset (e.g. selling stocks in a panic), or putting too much money into a single stock that doesn't work out, for example — have led many not just to rue and stew, but also sleepless nights, challenged marriages, and unreached dreams.

More recently, people have been selling what feels like an expensive stock market for several years. And yet we were at all-time highs in the stock market just a few days ago. The return stream of the market itself is now basically at its highest value ever.

Here are two suggestions given that our old choices inevitably follow us forever.

1. Give yourself some grace.

There is no perfect investor, just as there is no perfect moviemaker. There will always be things you could have done (or not done), and looking back will wish you would have done (or not done).

Acknowledging that as inescapable will release an enormous burden that many investors carry around about being right all the time. Markets are extremely random, especially over short periods, and no one deserves shame nor accolades for flipping coins correctly.

For any unforced errors you may have made, of course it's harder. But in my experience you're in the majority — most people, including me, regret some past financial decisions. You gain nothing except stress for looking backward. A better alternative is aligning to change toward this mantra for the future: make high-quality decisions amidst randomness, with the information you have at the time, and learn to live with both good and bad outcomes (because both will inevitably occur).

2. Put yourself in a position as an investor where you don't have to regret things.

Over longer periods, markets are less random. Investors have typically been compensated for taking well-calculated risks, as well as for avoiding silly ones without commensurate expected reward. If you have a well-designed investment plan, and don't veer far from it, you won't find yourself ego-bruised with urges to recoup self-inflicted losses, doubling-down on dubious risks, possibly leading to outcomes from your financial life negatively impacting your daily happiness.

To me, and our clients, and those who share our investment philosophy, this is not a possibility worth embracing.

In the pursuit of more reliable returns streams, investors must give up the moonshots (e.g. putting a lot of money into one stock) that are fun to play around with, but research has shown us, on average, don't work out well for most people.

Your investment horizon is the same length as your potential-regret horizon.

The task for investors is to determine what constitutes high-quality decisions. I would encourage you to trust the empirical evidence about what leads to better expected outcomes: no panic selling, no concentrated stock bets, no trying to outguess the market. Easier said than done, I know, but don't overlook the additional benefit of reduction in potential future regrets.

Should you use a financial advisor on your journey toward better decision-making?

Maybe. I'm not sold that as many people need advisors as the industry would market to you. Long-time readers know the sales-focus and commercialism of my industry deeply bothers me.

But I am also deeply bothered by how many investors wait too long to start making high-quality decisions amidst uncertainty. Many people hit extreme, large-magnitude inflection points in their financial life, and only seek out help AFTER they've made an irrevocable decision.

If you do choose to work with a financial professional, I suggest asking them what they think makes a truly great investor. Their answer reflects their value proposition, and it's worth comparing that to your own reason for seeking out their guidance.

Regardless, avoid a Hollywood movie mogul as your money manager.

I mentioned that at one point in the interview, Wilder gave an off-the-cuff get-rich tip:

Back some pornographic films and then, as a hedge to balance your investment should family values rise, buy stock in Disney.

He wouldn't have made a great client for my firm, but hopefully it turned out okay for him. Unfortunately the S&P 500 index has outperformed Disney stock by nearly 3X since the interview.

Unclear how the fleshy hedge would have worked, but just like every financial decision we make, Disney's underperforming contribution does not get buried.

Looks regrettable, so far...

End.