Don't Hurry, Be Happy.

A few months ago, Fern was driving me bananas.  Every stinkin' day he would ask the same thing over and over again.

"Can you buy me a shaver?"

"Can you buy me a shaver?"

"Can you buy me a shaver?"

He did not need a shaver.  But the peach fuzz over his lip was just visible enough to convince him that he did.

Then, one day, in a moment of either weakness or generosity (I'm not sure which) I finally broke down and bought him one.  The cheapest one I could find.  He was thrilled.  And because he stopped bugging me, I was too.  At least, at first.  But then he used that dang thing five times a day.

(There is only one guy on the planet who needs to shave that often.  I won't mention names.  But you know who you are, Klip.)

We finally took Fern's shaver away from him, and from then on, he had to ask for permission to shave.  Which, to his chagrin, we only grant him a couple of times a month.

One evening, I went into his room to kiss him goodnight.  I had one day old stubble on my face.  (When you are retired, you don't need to shower every day, much less shave every day.  Instead, you just time your personal hygiene efforts to coincide with public appearances.  This is what is known in early retirement vernacular as: too much information.)

So anyway, I kiss Fern goodnight and he exclaims,

"Ow!  We both need a shave!"

 

Seems like we're always in a hurry.  In a hurry to grow up.  In a hurry to complete a project.  In a hurry to get rich.  But the old adage is true: haste makes waste.  If you are in a hurry to grow up, you may miss the magic of childhood.  Rush a project, and your orbiter may disintegrate in the Mars atmosphere.  Buy into a get rich quick scheme, and you could end up pushing out retirement by decades.

You don't get rich quick.  You get poor quick.

"Whoa, whoa, whoa.  Hold on there, Deskwuss.  That is just plain wrong.  Look at Buffet.  Look at Soros.  Look at Icahn."

Well, yes, Slash.  There are a few exceptions.  But for every one of them, there are millions of Smiths, Browns and Millers who fell way behind their retirement plans because of more greed than patience.
 

"Hey, risk and return.  You yourself say they are inseparable.  All I'm doing is picking a couple stocks and taking on a little more risk to pursue more return.  What's wrong with that?"

What's wrong is that not all risk is equal.  There are two types of risk in every stock.

Systematic Risk: This is the risk of the entire market.  You can't avoid it, and you can't predict it.  It's like if World War III broke out.  Or Krakatoa exploded again.  You can't use diversification strategies to mitigate this risk.  But you do get rewarded for taking it on.

Specific Risk: This is risk associated with an individual asset.  Like, if a successful CEO is suddenly fired for embezzlement, or harassment or lying.  You get no reward for assuming this kind of risk.  (Trust me on this one.  Ahem.)

What this means is that when you pick specific stocks, you take on more risk than necessary in order to achieve the return you seek.  We more or less covered this in Rule 3: Invest Wisely (The Theory).
 

"Isn't it possible that my friends are diversifying away the specific risk by buying the right combination of stocks?"

 
It is certainly possible.  Although, I haven't come across anyone who actually attempts that, much less does an analytically rigorous job of it.
  

"Well, my friends are all into stock picking, and they are making a killing out there.  Every other month, one of them is telling me about how well they did.  I feel left behind."

 
Just ignore the boasting.  People tend to talk about their successes.  But they tend to stay silent about their failures.  Not to mention, they have selective memory.  I mean, think about all your friends who like to gamble.  How many of them admit that on the whole they have lost money?  Close to none, is my guess.  Because they all say something like, "I always quit when I'm ahead."  Yeah, right.  That's how casinos make gobs of money.
 

"But they are all so knowledgeable."

 
There are indeed a lot of people out there who know a whole lot of stuff.  They can talk nonstop about P/E Ratios, Book-to-Bill, alphas, betas, warrants, puts, dividend consistency, debt ratios, current ratios, liquidity, burn rate, IPOs, return on equity, and operating profit.  And they may utilize a variety of techniques to pick stock including candlestick charting, regression, fundamental analysis and even neural networks.

But does all this knowledge help them?  Evidence suggests otherwise.  One study looked at 401k accounts in a year in which the S&P 500 returned 15%.  What did the average account return that year?  A mere 1%.  The conclusion was that individual investors basically shot themselves in the foot trying to pick stocks and time markets.

"Maybe my friends are the smart ones making all the money, while stupid investors are dragging down the average."

Not likely.  Even the professional investors do lousy.  According to an article by Bloomberg,
 

"In a 2010 paper he co-wrote with Dartmouth College finance professor Kenneth French, Eugene Fama (Nobel Laureate) raised the question of whether active managers were lucky or skillful.  He determined that only 3 percent demonstrated skill, which, he found, is what would be expected purely based on chance."

 
In other words, only 3% of active fund managers beat index funds by enough to cover costs.  And even then, it wasn't at all clear if they beat the index by skill or just pure luck!  Professional stock pickers are pretty bad investors.  Your friends probably are, too. 
 

You get poor quick.  You get rich slow.

 
 
Don't be in a hurry.  Buy index funds and be happy with the magic of compound interest over time.  Then take half of the time you would have spent researching investments and come up with new ways to save more.  Take the other half and enjoy more of life.  You likely will come out way, way, way ahead.

A couple of weeks ago, I am washing up in the bathroom.  (I am going out to lunch later that day.  In public.)  Fern comes in.
 

Fern: What's that?

Deadwood: Rogaine.

(Hey, I thought I'd try it, okay?  Don't you judge me.)

Fern: What does it do?

Deadwood: Well, it's supposed to make my hair thicker.

Fern: How?

Deadwood: By keeping the follicles healthy.

Fern: Does it work?

Deadwood: I don't know yet.

Fern: Should I use it on my moustache?