The Independent Market Observer

In Life and Investing, Using the Wrong Map Will Get You Lost

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 22, 2014 2:17:09 PM

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StockMarket_6I’ve been thinking about Tufts University's decision to outsource its early education program, and why I feel so strongly about it. It’s not that I’m directly affected—Jackson will be finishing up there this summer before the transition. And it’s not that I’d necessarily disagree with the decision if I knew all the facts.

Besides the impact on people I like and respect, the thing that bothers me is that the decision makers seem to have focused on the wrong issues. Whenever you focus on the wrong things, any decision you make—however justified in terms of those wrong things—will turn out wrong.

To put it another way, using the New York subway map in Boston won’t get you to your destination, no matter how faithfully you follow it. I believe the Tufts decision makers were using a “minimize financial and legal liability” map, rather than a “maximize the institution’s values and long-term service to its stakeholders” map. Although they made a supportable choice, in the broader context, it was just wrong.

Smart, well-intentioned people do this all the time. In my own life, I often have to step back and see whether my decisions make sense in terms of my larger values. Should I be reading the paper, for example, instead of reading to Jackson? In the short term, maybe I want a break, but I need to keep focused on the bigger picture here. He won’t be young forever.

Getting back to investing . . .

The same applies to investments. Maps drawn by greed and fear tend to lead investors astray. Right now, for example, everyone is talking about how much the market is going up, and how it should continue to increase (or not). All of the commentary centers on the short term, which is not where most investors need to focus. The map presented in the media involves trying to buy when things are going up—or, in other words, time the market.

But what if we shift from the short term—stocks are going up!—to a longer, three- to five-year window? We know that, based on current valuations, returns over that time frame have pretty much always been disappointing, with the exception being the periods just before the dot-com bubble.

As I wrote the other day, the dot-com bubble is the exception that’s being recast as the rule. A larger map, one that shows the pitfalls just off the edge of the short-term map, suggests a very different outcome. It's a pretty powerful example of how you can make the wrong decision—load up on stocks!—because you’re looking at the wrong map.

Time to recalibrate your GPS?

Investing is my professional field and a primary area of interest, but the idea applies in all aspects of life. Some of the happiness research I’ve written about can also be framed in terms of planning your life around the right map rather than the wrong one.

Take a look at the maps you’re using to guide your life, and make sure they’ll really get you where you want to go.

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