Tess Vigeland: Every now and then we check in with Carl Richards, founder of Prasada Capital Management in Park City, Utah. You might be familiar with his drawings in the New York Times Bucks column where he takes an economic term or idea and using a Sharpie illustrates it on napkin. We’ve got Carl back with us for another rendering. Hey Carl!
Carl Richards: Thank you Tess. Good to be here.
Vigeland: Alright, tell us what we’re looking at on this napkin.
Richards: So this is a classic line graph and on the x-axis, it’s labeled “long-term wealth” and the y-axis is labeled “following the market.” And the line is slowing downward.
Vigeland: And what are we saying here?
Richards: Essentially what we’re saying is building long-term wealth has an inverse relationship with following the market.
Vigeland: Alright, I have to ask: Do you know how the market’s doing today?
Richards: Uh… I don’t. That’s a good sign!
Vigeland: That’s so counterintuitive though. I mean, we are bombarded with the daily fluctuations of the stock market. Why are we so obsessed with that and how unhealthy is that?
Richards: I think it’s become America’s greatest spectator sport.
Richards: I think the access to information and it certainly is entertaining, right? I mean, it’s something to talk about, it’s what all of our friends may or may not be talking about. You feel out of the loop if you don’t know what’s going on in the market. Now, again, two years ago, it was because we were just sheer panic and we didn’t know what to do. But even before, back in 2000, it really became… Sort of when CNBC is on at your dentist’s office, you know there’s an issue.
Vigeland: Is there any point to talking about the Dow or the S&P?
Richards: Well, I think there’s a fine line here. And this graph was generated by a conversation from a close family friend that really didn’t understand exactly what I did for a living and would repeatedly ask me, “Hey, how are things going on in the market?” And I would say, “I really don’t know. I haven’t really been paying that much attention.” After having that conversation repeatedly, he finally said to me, “What do you do?” And that was where I came up with this idea that investment success is about behavior, then information and skill may not have as much to do with it as we think. But to your question, it’s important for us to be informed when we’re making those decisions. But we shouldn’t be making investment decisions daily.
Vigeland: How often should we be making them then?
Richards: Again, and I think this is a big problem here, maybe reframing the discussion. Maybe the reframing is making sure that the investments we own match our lives, our goals, our view of — and this is a big fuzzy word — our view of risk. But making sure they match our goals would allow us to not be thinking about these every day, every month or every quarter.
Vigeland: How do you counter the noise though?
Richards: I don’t know. One trick I’ve learned is to maybe view it, instead of the money section, maybe it’s the funny section. Jim Cramer is a great example, right? Some people would say don’t watch Cramer. Well, it’s fine! Just recognize that it’s entertainment, not money. And if you can talk yourself into it, it’s much more fun to go to the movies. So it may just be finding a replacement for that constant chatter. Or realizing that it’s an important part of the discussion and it has value and it’s valuably informed, but just don’t act on it or have some stop-gaps in place to make sure you have to jump through a couple hoops before you act on it. Might make sense.
Vigeland: Alright, so you’re not telling people to stop listening to financial shows, right?
Richards: Oh, of course not! Absolutely, of course not. Just don’t necessarily run out and act on it.
Vigeland: Alright, thanks Carl.
Richards: Thank you Tess.
Vigeland: You can find Carl’s Sharpie drawings and a link to his blog “Behavior Gap” here.
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