A Note on Time Horizons

One of my favorite quotes about finance is from Morgan Housel.

“Most financial debates are people with different time horizons talking over each other.”

Actually I take that back — a lot of my favorite quotes about finance (and life in general) are from Morgan Housel, not just one. He’s one of those guys that you’ve just got to read. He speaks almost entirely in principles. Everything he says is timeless.

The world is flooded with financial analysis and commentary, the same way it’s flooded with any other kind of information. And if you’re in finance you probably spend hours and hours a week perusing journals, articles, blogs and emails looking for your next big idea. Your job is to dance around in your information ecosystem, looking for what's relevant. Looking for that next piece of information or that next observation that’s going to make you or your clients money.

Most financial commentary, for the average person, is not going to be useful. But it’s not because most finance writers are inept — it’s because everyone has different goals over different time frames. Everyone needs different information.

If you're a short-term trader reading financial commentary, the question you should be asking is "is there a trade?" What this means is, okay this is a nice article, but is there something actionable here? Is there some asset that I can trade, right now or soon, that will make me money for holding this belief? If not, the information probably isn't useful. Not to you, at least.

But if you're a long-term investor, your relationship with information is different. What you're looking for isn't sudden signals, it's small updates to your long-term view of the world. You're looking at business optimism, demographics, growth projections, credit conditions, geopolitics, and financial statements.

You’re not trying to guess what things will be like tomorrow, you’re trying to guess what things will be like in 30 years. In the long game, it's the slow development of subtle details that matters. Which means keeping a big, detailed picture in mind and updating it as you go. That’s what Bayesian thinking is.

A lot of financial debates and conversations are these two different kinds of people trying to talk to each other. Which is like trying to put airplane wheels on a bicycle. It really doesn’t make sense.

To some extent, you have (and need) both a trader's mindset and an investor's mindset in your everyday life. There are decisions you make with the information before your eyes, and there are decisions you make based on what you know about the entire world. Short-term and long-term. Small advantages captured in the moment and bigger ones built across time.

People have been comparing the United States to the Roman Empire for at least 100 years.

If you ask me if I think the U.S. is just like Rome, my answer is mostly yes. If you ask me if I think the U.S. will fall from its position as world leader in the next 200 years, my answer is yes.

Is there a trade? Is there a way to profit from thinking the American Empire is falling? No. Not right now. There’s nothing useful that we can do with this belief.

But it's important to remember that big, bad things often happen on big, bad time horizons. While people watch and comment about it the whole way. That doesn’t mean they’re wrong, it just means there’s no trade.

And it's the same way with big, good things. They don't have to happen all at once.

I have seen many social/political debates where one party accuses the other of faulty thinking because they use “the slippery slope fallacy.” They'll say, “what you're arguing isn't valid, because your argument rests on the assumption that things will get [worse/better] based on this one incident. That if we enact this one law, things will spiral from there. Slippery slopes are not valid reasoning for social policy.”

That always struck me as an incredibly stupid debate tactic (and a basic admission of low intelligence), because it implies that good and bad things always happen suddenly, all at once. Which most of the best and worst things in life don’t.

Ask the people who fled Germany in the 1930s if they believe in slippery slopes or not.

If you don't believe in slippery slopes, you must also not believe in compound interest. Because they're the same thing, going different directions. One makes things better, one makes things worse.

This is how relationships get bad, how families become dysfunctional, and how investment money is made or lost. This is how the best and most rewarding relationships in your life are built or destroyed. Over time. Through slippery slopes and compound interest.

If you wake up every day and kiss your wife and do one nice thing for her, 20 years from now you’re going to have a completely different marriage than the man who didn’t.

Another place I've seen hidden disagreements over time horizons is in business.

Sometimes you'll see two people debating about a particular business strategy — how to monetize a product, how many people to hire, what the company's branding should look like. Two people can disagree and debate over key business decisions and come up with totally different ideas even though they work in the same company and have the same goals.

And what it often comes down to is that they're thinking in two fundamentally different ways.

Maybe one person is trying to maximize revenue and cut costs, while the other is trying to build a durable and sophisticated brand that will stand the test of time. One cares about the bottom line right now, one cares about the bottom line 18 months from now. Or 15 years from now.

Neither of these two approaches is wrong. There's a time and place for both, and each comes with its own set of trade-offs.

It often isn't that one person understands the business better than the other, or that one person cares about revenue and the other doesn’t. It's that they're thinking about strategy on two different time frames. If they realized that, they could probably settle the debate more quickly and identify the trade-offs more accurately.

One time I was arguing with my girlfriend about a very particular thing I had said. I had said something that, in the moment, seemed perfectly logical and harmless. It was a strictly reasonable and honest thing to say, and it was true in my eyes.

She did not see it that way.

She wanted me to admit that what I said was hurtful and insensitive, and she wanted me to take it back.

I wanted to argue that what I said was technically true, even if there was some nuance required. I wanted her to admit that the essence of what I had said was accurate and that I hadn't deliberately hurt her feelings.

I wanted her to not be hurt, but I also wanted to be right. Because technically I was right. Said every man who ever drew breath.

What she wanted was to trust me. And for me to be able to admit that what I did had hurt her, and for me to be willing to swallow my pride to make her feel safe and secure and happy again. She wanted me to throw away my short-term win for her long-term happiness.

It took me a while to realize this. And when I did, I apologized.

We weren't arguing over correctness, we were arguing over time horizon. And her time horizon was more important than mine.

Drink some water and don't take investment advice. From anyone.

JDR

“Good marketing wins in the short run and good products win in the long run.” - Morgan Housel