Odds are, you’re aware of the infamous “Marshmallow Test”.
This was a 1972 Stanford psychological experiment whereby researchers put a marshmallow on the table in front of a child and gave them the choice to eat the marshmallow (which is essentially crack for a 3–6 year old) right now, or they could wait 15 minutes and be rewarded with a second marshmallow.
The researchers theorized that impulse control may be a good predictor of long-term success in life.
They were right.
Some kids waited it out until they could resist no longer. Some gave in quite promptly. One girl ate the marshmallow before the instructions were even given to her. A few muscled through the temptation and emerged on the other side victorious, two marshmallows in hand (mouth?).
The researchers subsequently tracked the life outcomes of these children for several decades and discovered that the children who were able to practice delayed gratification during this marshmallow test ended up having better life outcomes than those who could not wait, as measured by SAT scores, educational attainment and overall health.
This study has permeated countless homes, business schools and even churches as it extols the values of delayed gratification, avoidance of temptation and perseverance in the face of struggle. After all — it is the weak and body who give in and the stoically strong who shun the temptations of now for the spoils of later, is it not?
It is not.
Like a multi-generational game of psychological-study telephone, history has caused a crucial detail of this study to become either excised or forgotten.
These Stanford researchers observed an interesting commonality among all the children who were able to successfully resist the allure of that first marshmallow. The children who succeeded did not do so through sheer willpower, nor did the marshmallow present any less temptation to them than it did to their less-successful peers.
They just distracted themselves better.
Some of the victors closed their eyes and sang songs to curb their cravings. Some hid under the desk. One boy spent the entire 15 minutes picking his nose.
Are these the behaviors of stone-willed champions? Were the victors of the marshmallow test really those who had more intelligence, morals or even willpower?
Unlikely.
The “losers” of this test did not give in because they thought that the promise of a second marshmallow was made in bad faith. Nor did they give in because the marshmallow was more alluring to them than it was to those who waited.
They gave in because the marshmallow was right there and they were unable or unwilling to be elsewhere or doing something else. The winners won simply because, to them, the marshmallow wasn’t really there.
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Being smarter than the average investor has little to do with your long-term investing success. As Warren Buffett famously quipped: “You don’t need a lot of brains in this business. I’ve always said if you got an IQ of 160, give away 30 points to somebody else, because you don’t need it in investments.”
When it comes to investing, being intelligent really doesn’t matter.
Don’t get me wrong — being stupid will not make you a better investor. But successful investing has much more to do with the things you don’t do.
In 2013, the investing juggernaut, Fidelity, did an audit of the 10-year performance of all their customers’ accounts to determine what demographics garnered the best (and worst) returns. The second-best investors were those who were “inactive”, meaning they had not touched their accounts for an extended period of time. The best investors?
They were dead.
The average global IQ is 100. The average IQ of a dead person is presumably 0.
Dead people don’t have access to the Wall Street Journal or a Bloomberg Terminal. Dead people don’t have r/WallStreetBets. Dead people don’t have free 24/7 access to a licensed financial advisor directly from their smartphone, tablet or laptop.
Most importantly: Dead people don’t have a timeline.
Look at a ten-year chart of the S&P 500 over any given 10-year period. It has yielded positive returns 88% of the time, with the average being 103.8% and the past 10 years resulting in an astonishing total return of 212.5%.
Since the inception of the United States stock market, there has been no 20-year period where the S&P 500 has yielded a negative return.
It takes very little intellectual firepower to deduce “If I put my money into the S&P 500 and just let it be for a few decades, I will generate impressive returns and be in a financially favorable position.”
Dead people don’t succumb to the temptation to jump from stock to stock in hopes of “the next big thing”. Living people do. We want the 30-year return of the stock market… but we want it in 2 years.
This is when mistakes happen.
The soil a tree is planted in has a substantial effect on its growth. But once suitable soil has been found, the best growth strategy is to just let it be. A tree planted in good-enough dirt will far surpass a tree that has been uprooted and re-planted every time “the next best dirt” has been located.
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I used to work in finance full-time. Literally every few minutes, I would get an alert from a financial news site, see a new headline on the Motley Fool or get a Reddit notification about the next stock, cryptocurrency or commodity about to explode. If I followed every hot tip, my portfolio would see more turnovers than the 1978 San Francisco 49’ers (you might have to Google that joke). I’d have fun. I’d be chasing the high of striking gold in the next assured moon-shot of an investment.
I’d also be exponentially poorer.
Investing in a low-cost index fund is the financial equivalent of eating your vegetables. It’s bland and unenjoyable. You know it’s good for you but that doesn’t make it any more fun.
Investing in the next hot stock or cryptocurrency is more like candy. It’s sweet and fluffy and gives you that immediate dopamine hit. It’s… a marshmallow.
And if you’re anything like a 3–6 year old — and most people are to a greater degree than they’d like to admit — then there’s only one way to shun today’s one marshmallow in favor of tomorrow’s two.
Forget it’s even there in the first place.
There’s an interesting disparity I’ve noticed amongst my colleagues and friends who are active investors, compared to those who are “set-it-and-forget-it” (passive) investors.
The passive investors seem to have way more of a life AND are doing better in the stock market.
It’s not my friend who is steadily up on his target-date retirement fund who wants to always talk investing, but my friend who just lost 60% on Shiba Inu Coin but is still convinced his next big idea is the real winner. The target-date fund friend is too busy golfing, reading or spending time with his family to have bothered to have even heard of Shiba Inu -and he’s better off because of it.
These long-term investors are not successful because they daily choose to stare in the face of the potential returns of the next big thing and say “No, not today. I will resist.” No — they’ve wholly removed the temptation from their sight and from their minds. They are the financial nose-pickers who have distracted themselves long enough to win the game they almost forgot they were playing.
There’s sufficient historical data to know that if you invest in the broad stock market and let time and compound interest do their thing, you are in for a handsome reward. But do you want to wait for two marshmallows when you can have the one in front of you right now?
Yes. Yes, you do.