Practicing self-discipline is critical for investors, but mastering ourselves is no easy feat.
In 1968, researchers from Stanford University stuck a marshmallow in front of a 4-year-old girl and gave her a choice: eat the marshmallow now or wait 15 minutes and receive TWO marshmallows. If the child succumbed to temptation, she would be among the two-thirds of her peers who were unable to delay gratification. If, on the other hand, the girl managed to wait 15 minutes, she would join a smaller group who exhibited greater self-control.
Years after punishing more than 200 children with whiffs of sugar and corn starch, the researchers found a correlation between self-discipline and success. The children who demonstrated self-discipline were performing well in their scholastic and extracurricular activities, while the “one marshmallow” kids had mixed performance and many were failing. The “two marshmallow” kids enjoyed far more success.
Practicing self-discipline is critical for investors. While the investment landscape may be complicated, financial wealth ultimately comes down to a simple mathematical formula: the rate at which your after-tax savings compound over time. Self-control is a key determinant of how much you save and how well you compound your wealth. Self-discipline is also necessary to avoid making behavioral errors. To buy when others are fearful, and sell when others are greedy, one needs the self-discipline to detach from the strong emotions created by volatility in the market. Yet this is not an area in which people typically excel.
Our biological hard-wiring creates challenges of self-control. When a slice of decadent chocolate cake sits in front of you—its aroma of warm cocoa and sugar dancing under your nose—all the health rationale in the universe can float out the window. Our bodies crave sugar, salt, fat, adrenalin, drama, rushes. We want the designer purse, the sports car, the romantic tryst. But surrendering to these cravings often undermines our long-term goals.
In the 40 years Mawer has been an investment manager, we have found predetermined, systematic processes and routines to be effective strategies for self-discipline. Often, lapses in self-control occur when a situation demands an immediate answer and there is no established evaluation process. When none exists, short-term desires and physiological urges can conquer even our best intentions. But when a systematic process has been established in advance, it is easier to make decisions that are consistent with your long-term goals and values. Predetermined routines can also help automate desired behavior, ensuring that our limited willpower is saved for the most important decisions.
Ultimately, investors must practise self-control to be effective. But gaining this self-control needn’t require a Herculean effort. Often, a simple, systematic process is enough.
