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1Q 2021 Quarterly Letter

“Our doubts are traitors and make us lose the good we oft might win by fearing to attempt.” – William Shakespeare

In the past two quarters, I have observed the behavior of both the market and consumers, and it reminded me of a study conducted in the 1960s.

You may have heard about what’s become known over the years as “the marshmallow test” conducted at Stanford University. The study focused on the control of deferred gratification and how it develops in children. Subjects from the ages of four to six were led into a room, empty of distractions, where a treat of their choice was placed on a table by a chair.

The subjects were told they could eat the treat then, or if they waited for fifteen minutes, they could have both the treat and a second one. In follow-up studies researchers found correlations between the results of the marshmallow test and the success of the children many years later.

The first follow-up study, in 1988, showed that preschool children who delayed gratification longer in the self-imposed delay paradigm showed higher levels of self-Control. More than ten years later their parents described them as adolescents to be significantly more competent.

I wouldn’t be surprised if they were wealthier than their peers as well.

To be successful, you need emotional intelligence. Your investing strategies can’t be motivated by emotional preferences like fear or greed. They must be motivated by data. I like to remind beginning investors that, in the early days of baseball, tobacco-chewing old-timers would sign players based on their gut instincts about an individual player. But today, it’s all about metrics—in baseball and in the investment field. Data has the answers. Don’t let emotion distract you.

Years ago, a young man whose inheritance I was managing wanted to know if it was all right if he bought a new truck.

“How much is it?” I asked.

“Twenty thousand,” he told me. “Do you think it’s worth it?”

How would you answer that question? Again, the decision requires thinking ahead.

“The question isn’t whether you think the truck is worth $20,000,” I told him. “The question is whether it’s worth $$905,000 because that’s the future value of that money in 40 years.”

The graph below shows the value of $20,000 if compounded at 10% for up to 40 years.

From a market perspective, this graph shows the actual growth of the $20,000 if invested in the S&P 500 over the last 40 years.

The “magic” of compounding is truly amazing. Instead of 10% in the first graph, the annualized rate over the past 40 years for the S&P 500 was actually 11.5%.

Impatience results in lost opportunity. Immediate gratification results in consumption and immediate gratification.  There is no reward beyond the immediate.  

To reap the rewards of investing and compounding it does require long term perspectives.  To be able to balance immediate gratification against long term security requires discipline along with faith in the future.   Discipline without faith is not very likely to work.  Each requires the other.

You might also think about it like this: Had “only” $15,000 been spent and $5,000 been invested the result would still be substantial.  The $5000 would have grown to $389,000.  One thing is consistent in respect to most items we consume and that is the object of consumption [ truck] 40 years later has a value of $0. The truth is the 20 something I was advising would have done fine with a $15,000 truck.

Look around you, most of what you see used to be money.

Spending money is not a problem.  Spending too much of it is a problem realized by many as we reach retirement.  Think how different your balance sheet would look if most of your consumption was reduced by 10% with the difference invested for the long term?  Remember you can only spend a dollar once.

Sincerely,

Thomas J. Curran
 Founder & CEO

Curran Investment Management® is Defining Quality®

Source: Mischel, Walter, Yuichi Shoda, and Monica L. Rodriguez. "Delay of Gratification in Children." Science 244, no. 4907 (1989): 933-38. Accessed October 4, 2020. http://www.jstor.org/stable/1704494.

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The contents of this video are for educational and informational purposes only.  The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. It is not, and should not be regarded as “investment advice” or construed as a “recommendation” or an offer to buy or sell a specific security.  CIM, LLC does not provide tax or legal advice.  Performance shown or referenced is historical only.  While past performance cannot guarantee future results, it may be useful in comparing alternative investment strategies over the long term.  Performance results include accounts that were managed by another entity.  Performance returns will be reduced by advisory fees and other expenses incurred in the management of your investment advisory account.  No one connected with CIM, LLC can ensure tax consequences of any transaction.  The information contained in this article may not apply to your personal circumstances.  All investments contain some degree of risk, including the potential for loss of principal.  Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation.