Beware: Short Term Considerations, Long Term Implications

#MakingBetterDecisions, #Goals,?#focusonwhatmatters, #Wealth, #Careers

“Success carries within itself the seeds of failure, and failure the seeds of success.” – Howard Marks

Two weeks ago, one of my readers reached out to me for advice on getting out of a tight spot his life has come into. I learnt about his background and was able to identify a set of pivotal decisions that changed the course of his life. These decisions spanned career choices, residential location choices and emotion-laden family situations. The key characteristic that rendered these decisions less than wise is committing to long term implications relying on short term considerations.

Making long term decisions based on short term considerations is one of the most limiting yet one of the most prevalent decision mistakes that most people commit. I certainly made more than my fair share of them in my life.

Here are a few everyday examples of such decisions.

Buying a house that required a large loan to be taken up – that you are able to afford only because of the recent hike in your salary.

Buying a house in a location you are familiar with (perhaps close to where you are currently renting out) while there are reasons to believe that city may not develop further in that area or city may develop in other areas i.e., future career opportunities may be found commonly in other areas of the city.

Looking to change jobs at the first or second sign that you do not like your boss.

Moving to your hometown lock, stock and barrel because COVID-19 allowed remote working. And then buying a house there.

These kinds of decisions are not just made by individuals. History is riddled with spectacular failures of organizations that committed similar mistakes. From recent memory, Silicon Valley Bank’s (SVB) failure is essentially due to them committing this mistake. Technically, all banks have this problem – their entire business model is reliant on accepting short term cash (Demand/Time deposits) and investing that in long term assets (housing loans, long dated bonds etc). That is why banks are expected to actively manage risk of “duration” mismatch in their portfolio. The reasons that caused this imbalance to materialize for SVB were quite specific to SVB – non-diversified client base, heavy reliance of VC funds that poured into technology sector, tech sector meltdown and sudden uptick in inflation.

Leverage is ultimately the ticket to a better life for most of us. Financial leverage is easy to understand and appreciate – for one thing, without large loans most of us will never be able to afford to buy a house. But leverage comes in other forms too. You commit yourself to a particular educational stream – say, Bachelor studies in Engineering or Commerce/Accounts or Medicine or Law. When you take up such high commitment programs, you expect it to provide you with life-long leverage in terms of better career prospects or business opportunities. When you join a firm and commit to long hours for several years, you may be expecting that the firm will provide long term employment and career value back to you. Any time there is leverage involved, one is exposing oneself to the risk of getting locked in.

“There are old investors, and there are bold investors, but there are no old bold investors” – Howard Marks

You should make all your big decisions with a long-term mindset and remove short term considerations completely from the decisioning process. Like most important things in life, this is easier said than done. We tend to get caught up in the moment, we tend to buckle under emotional weight, we tend to get swayed heavily by what others around us are doing and thus, we tend to make high-cost decisions with short term orientation. In such decisions, value tends to accrue slowly over time, but the cost and commitment typically tends to incur over a short period of time. And then situations may arise where the short-term costs may cause permanent impairment to your long-term prospects.

There are various ways in which great investors make money in stock markets. The big wealth creators (investors who tend to invest on multi-baggers) generally tend to look for companies that do not have any debt on them – or at worst, benign levels of debt. This is because during economically tough times, companies with debt tend to get squeezed out. In the short run, taking on debt reduces cost of capital and increases opportunities for growth whereas in the long run, debt, at best, inhibits firms and individuals from exploiting the occasional, random, high-alpha opportunities – and at worst, render them bankrupt.

Bottomline

“The classical virtues are all decision-making heuristics to make one optimize for the long term rather than for the short term.” - Naval Ravikant

Making permanent decisions on the basis of transient developments generally ends up in sub-par outcomes. In his book “Mastering Market Cycles”, Howards Marks described in great detail how economy, businesses, capital availability and human emotions go through endless cycles from despair to euphoria, from optimism to pessimism, from aggressiveness to defensiveness, from easy access to capital to not finding capital at all – even when the average quality were to inch up over the long term. This is so true for most people’s lives as well. While most of us do end up improving our lives over the long run, we do cycle through inevitable phases of ups and downs. It is important not to lock yourself into long term commitments by extrapolating from either the “up” or the “down” phase. Instead, we will be much better off if we orient our decisions along the long-term underlying trend of our lives.

In the minimum, do not make significant decisions in emotional extremes like anger, sorrow, greed, envy or complacency. Also avoid decisions that constrain you from making choices freely in the future. And never, ever make a call that threatens your well-being, no matter how unlikely this threat may seem.

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Thanks for taking time to read this. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals and desires. I share stuff that I have personally experienced or experimented with. If you find this newsletter worthwhile, please do share it with others – of course, only if you do not mind it.

A bit on my background

I worked in India and the USA with most of my work experience with large global organizations. My last corporate role was the Head of Technology for “Treasury and Trade Management Solutions” for Citigroup South Asia cluster. At Citi, I set up from my Business Unit and grew it from a team size of 1 to over 1900 Citi employees in a span of eight years.

I quit Citi in 2021 to focus exclusively on my interest area of improving decision making. In the last 2 years, I studied this topic closely and developed a training course to systematically improve decision making ability.?I’m also an Investment Advisor (RIA) registered with the Securities and the Exchange Board of India (SEBI). As an RIA, I analyze and prepare financial plans to help people achieve their financial goals.

I have done MBA in Strategy and Finance from Carlson School of Management at University of Minnesota and B.Tech in Mechanical Engineering from Indian Institute of Technology (IIT) Bombay.

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