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In the world today, you can get most of what you want from a simple click:
- Want to eat? Click.
- Want a cab? Click.
- Want a book to read? Click.
- Want to know which of your friends are going to be in Johannesburg over the holidays? Click.
- Want some entertainment? Click.
- Catch up on news? Click
Gratification is almost immediate.
You want to invest? Click.
Unfortunately with investing, there is almost always no immediate gratification. In fact, if you invested in a predominantly equity based investment, then market gyrations can even have the opposite effect of gratification – causing you serious consternation as the value of your investment rises and drops.
In investing, your gratification comes only years later.
We know that it is “time in the market” that gives you the best opportunity to grow your wealth. Having the patience to allow your investments to get the benefit of compound growth over many years will most likely result in real growth in your wealth. But most of us are not wired to wait many years to see results – we want to see immediate results.
The Vitality program from Discovery (a Lunar BCI Worldwide Fund core holding), incentivises healthy living. Whilst one can see the benefits of healthy living within a few months, the real benefits are substantially more in the long-term. So by providing Vitality points for day-to-day healthy living (exercising, eating healthy food, regular check-ups, etc.), Discovery has found a way to provide some early gratification for behaviours that one may only get the benefit of much later in life. Needless to say it is also good for Discovery’s business to have healthy clients.
At Lunar Capital, we regularly ask ourselves how we can incentivise investing.
If you have the patience to regularly invest over the long-term, then you don’t really need short-term incentives. But most of us do not have the patience and want some form of instant gratification. We need incentives to make us invest for the long-term. We need a Vitality programme for investors.
History and Culture of Investing
In South Africa, our history tells us that the majority of the population of this country were left on the economic side-lines. They did not have any way of learning about investing from their families as most families lived from hand-to-mouth.
Those that were in the economic mainstream would in all likelihood have had the benefit of learning from their parents about the importance of investing or seen first-hand the benefits that investing brought to their parents. They may also have had the experience of having a savings account or better still an investment account opened in their names when they were young. In this way they learnt early on about interest and compound growth. With this first-hand experience, they learnt about the value of delayed gratification in investing.
Post 1994, the Black middle-class in South Africa grew quite quickly. But investment levels in this sector is still very low. There are a variety of reasons for this, like providing support to the extended family and having to start building their economic lives from virtually nothing. But not having the first-hand experience of the value of long-term investing has also played a big role in low investment levels within our communities.
And hence our drive at Lunar Capital to improve the knowledge of investing within these communities. As a small business, we cannot afford to develop and run an incentive programme like Vitality at this stage. So, we try to incentivise people differently.
Teach a man to fish
By sharing our insights and the insights that we learn from others, we aim to make our clients more knowledgeable so that they can invest on their own. They can be more selective when acquiring the services of professionals, using them only for specialised requirements. In this way they reduce their costs and are also not influenced by the biases (some incentive induced) of their professional advisors.
Similarly, we also provide tools that allow investors to better track their net worth and their asset and liability profile. In this way, they can track the growth of their net worth and make informed decisions on where and how they need to invest to meet their long-term financial goals. We have run free workshops to help people track their investments and develop an investment strategy for themselves. Many people find that by tracking their investments over a few years and by observing this growth, this in itself becomes an incentive to invest more.
We also recently started a Share Focus campaign where we aim to regularly feature a company and provide some of our views on that company so that individual investors can use that in determining whether to invest in that company or not.
Unfortunately, none of these are the kind of incentives that provide instant gratification. What we aim to do is to “wire” into our clients and followers the importance of improving their knowledge of investing (LEARN); being invested over the long-term (INVEST); and by delaying gratification, getting much bigger rewards later on (ENJOY).
Learn to delay gratification
In a long-term experiment with children, where a child is put into a room with a marshmallow. The child is told that she can get two marshmallows if she does not eat the marshmallow in front of her until a bell is rung after approximately 15 minutes (quite long, especially for a child).
What was found was that those that could hold out, generally performed better in life as they grew into adults. One can interpret from this experiment that those who have the ability to delay gratification, will get bigger rewards later.
This is exactly the case with investing. Those that can delay gratification will earn outsized rewards later on. Develop a strategy to invest for the long-term and stay the course. The benefits will be much bigger than what you give up now.