What’s Your Time Preference?

Hi, The Investor’s Podcast Network Community!

Happy Tuesday and welcome back to We Study Markets!

Goldman Sachs beat earnings estimates and provided some optimism yesterday morning, but the market later tumbled 215 points or 0.7% as Apple announced some bad news.

More earnings announcements today to keep your eyes on including from Johnson & Johnson, Netflix, and Ally Financial. 👀

Today, we’ll also discuss how your time preference can help or hinder your life, learn some wisdom from Jesse Livermore and Philip Fisher, with much more, in just 4 minutes to read.

Add to your investment smarts and read on! 💡

IN THE NEWS

 🍎 Stocks slide as Apple announces hiring slowdown (IBD)

Explained:

• Apple announced it would slow hiring and spending next year in preparation for a possible recession. The stock dropped 2.1% to $147.07 in reaction to the news.
• While Goldman Sachs reported better than expected earnings, Bank of America missed expectations and announced second- quarter profit fell 32%.

What to know:

• Most of the nation’s largest banks have reported second quarter earnings at this point, and investors have closely monitored the results to determine if the Fed’s efforts to curb inflation with interest-rate increases are causing a recession.
• Bank of America’s CEO, Brian Moynihan, said, “despite worries of a slowing economy, our customers’ resilience and health remains strong.” U.S. consumers appear to be in healthy financial shape and are keeping up with their debt payments while increasing their spending. Credit card spending rose 17% at Bank of America.

↘️ Homebuilder Sentiment Plunges (CNBC)

Explained:

• The National Association of Homebuilders/Wells Fargo Housing Market Index dropped 12 points to 55, which was the largest single-month drop ever, except for April 2020. Any number above 50 is still considered positive, but since March, when rates first started to rise, the index has fallen 24 points. Concerns about inflation and possible recession have taken a toll on builders’ outlook.

What to know:

• Rising material prices, production bottlenecks, and higher borrowing rates have sometimes pushed the cost of building a home higher than its sale value.
• Affordability is the greatest concern facing the housing market as large segments of the population are getting priced out of the market.

Twitter fires back at Musk (WSJ)

Explained:

• Elon Musk and Twitter continue to battle over an unraveling $44 billion acquisition. Musk had offered to take the company private at $54.20 per share, but has now requested a slower trial schedule to have time to conduct discovery around whether Twitter has misrepresented the amount of spam and bot accounts on the platform. Twitter fired back and accused Musk of using delay tactics and creating a “sideshow.”

What to know:

• Twitter claims less than 5% of its daily active users are bots or spam accounts, while Musk claims the number is closer to 20% of its user base.
• Twitter claims that the real reason Musk is backing out is market conditions have soured since he made his offer, resulting in his net worth declining by more than $100 billion since its peak last November. Ouch! 🤕

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DIVE DEEPER: Low vs. High Time Preference

Time preference is a key concept of The Austrian School of Economics. We’ll discuss the Austrians later, but for now, let’s talk about time. In investing, you’ll often hear about individuals having a high or low time preference. What is this, and what do we mean by it?

High time preference thinking is mostly concerned with only the needs of the present moment and tends toward wanting immediate gratification. Our culture surrounds us with distractions and often leads to high time preference activities like bingeing on Netflix, scrolling mindlessly on social media, or living off fast food. These activities provide a quick dopamine hit, but the long term effects can lead to a less than ideal life.

Low time preference thinking places more emphasis on future needs and delays gratification. Low time preference activities take more discipline, thoughtfulness and concern with how one’s present choices will affect one’s future self. Low time preference behaviors include saving money, exercising, eating high quality food, and getting adequate sleep.

So what?

Are you familiar with the Stanford marshmallow experiment? It was a fascinating study conducted in 1972 on delayed gratification and indirectly on high versus low time preference. In the experiment, a child was given a choice between a small but immediate reward or two small rewards if they waited for some time. The researcher explained they could eat a marshmallow now, or if they could wait 15 minutes, they would receive two marshmallows. They left the child alone with their marshmallow and returned 15 minutes later.

The life paths of the children who participated in the experiment were tracked over time. Not surprisingly, those children that could hold out for 15 minutes and get the extra marshmallow had better life outcomes based on SAT scores, educational attainment, body mass index, and several other markers compared to the children that immediately ate the first marshmallow. They knew how to practice low time preference behavior.

The Takeaway?

I first came across the concept of time preference in Saifedean Ammous’ book The Bitcoin Standard. Dr. Ammous is an economist and Bitcoin educator who states that everything we do is a trade with our future self, and in each moment of your life, you are making decisions that make your life better or worse. No pressure!

Being conscious of this notion helps you make better decisions in the short and long term and leads to low time preference thinking and living. From an Austrian Economics perspective, time preference determines how much people will be saving or consuming and also affects the interest rate paid on savings. Dr. Ammous also states that sound money holds its value and lowers society’s time preference. It encourages people to save, defer consumption, and develop a mindset of spending only on high-quality, useful items.

Whether you agree or not, he claims that Bitcoin is the soundest money known to man, and lowers people’s time preference as they begin to appreciate the opportunity cost of giving away or being frivolous with something scarce. He shares stories of people quitting addictive habits like smoking or drinking and putting the money into Bitcoin instead.

Thinking about our daily choices related to time preference is a great activity. We can review our habits and choices from everything to investing, fitness, diet, and overall lifestyle.

Dr. Ammous recommends pondering a good question: “Are you delaying your long-term goals because you are too busy with your day-to-day activities rather than investing in things that matter to you in the long run?”

Let us know what you think! Does Bitcoin affect one’s time preference? Is it the soundest money ever created, as Dr. Ammous claims? Has owning Bitcoin affected any of your lifestyle decisions?

Listen to Preston’s interview on Bitcoin Fundamentals and learn more about the thoughts of Saifedean Ammous here.

QUOTE OF THE DAY

“If you can’t sleep at night because of your stock position, it means you’ve gone too far.”

— Jesse Livermore

Jesse Livermore was one the world’s greatest traders and Reminiscences of a Stock Operator, a book about his life by Edwin LeFevre, should be required reading for all aspiring investors. Livermore amassed a huge fortune shorting the stock market in 1929 and was worth $100 million at the time, which equates to $1.5 billion in today’s dollars. Unfortunately, he made and lost several fortunes during his career. His life, which ended in suicide in 1940, provides a cautionary tale of the dangers of speculation and “getting out over your skis,” as they say.

Livermore liked to trade in stocks that only showed a clear trend. He developed his own trading systems and methodology and only traded his own account. Jesse was highly successful, but lost several fortunes, usually from deviating from his own rules.

Meaning

Mr. Livermore certainly dealt with wide-ranging emotions over his trading career. Fear and greed, as we know, run the markets, and human psychology doesn’t change much over time. It’s important to keep one’s emotions in check and remain rational and logical while investing over time. This is hard to do when we hold positions that make us lose sleep at night. This could mean using too much leverage, speculating on highly risky cryptocurrencies, or buying something you don’t understand.

If you’re tossing and turning over an investment, you’ve likely made an investing mistake. Re-evaluate. Are you using too much leverage? Do you have conviction and understanding of what you hold? Maybe it’s time to liquidate or sell off a portion of the investment. You need to think clearly, and if your investments are keeping you up at night, it may be time for some changes.

TAKEAWAYS FROM PHILIP FISHER

Morningstar called Philip Fisher “one of the great investors of all time.” He was the author of Common Stocks and Uncommon Profits. Buffett said the book was “very, very good,” and someone once said Warren’s investing style was 85% influenced by Ben Graham and 15% influenced by Phillip Fisher. This is enough reason for us to study him. Many great lessons can be learned from the book, but today we’re going to focus on Chapters 8 and 9 and explore some of the “Don’ts for Investors.”

What to know

Knowing what not to do is just as important, if not more important, than knowing what to do. Or, as Charlie Munger once said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be intelligent.”

Here are some of Phillip Fisher’s ideas on what not to do:

• Avoid buying promotional companies that have little to no history. A suitable investment must have several years of economic data to conduct a proper analysis of the business.
• Don’t go over the top with diversification which can lead to owning businesses you don’t understand and reduce overall returns.
• Do not be afraid to buy on a war scare. In these situations, stocks temporarily decline, and inflation rises. But the economy and market typically rebound.
• Do not follow the crowd in determining the stock market’s value. Avoid groupthink and don’t listen to the TV talking heads.
• Do not worry about quarters or eighths in the stock price. If you’ve found the right stock and it is reasonably priced, go ahead and buy it. Do not wait in hopes you might purchase the stock for cheaper.

These are some of Fisher’s main investing “don’ts” of which to be aware. We’d be curious if you have your own investing “don’ts” or guidelines you like to follow? Let us know your thoughts, and reply to this email to let us know!

Check out Stig’s review of Common Stocks and Uncommon Profits here to learn more!

SEE YOU NEXT TIME!

That’s it for today on We Study Markets!

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