Overview – Learning to Think Far Into the Future
When trying to achieve any sort of long-term success, whether it’s in investing or any other endeavour, there are undoubtedly several factors that go into making sure that happens. One of those factors is setting yourself up today such that the right pieces fall nicely into place down the road.
You can’t possibly hope to achieve any big goals if you’re off-course right from the start, so how do you know what sort of actions you need to take today in order to get the future success you want? The answer lies in long-term thinking.
So many people fall into the trap of only worrying about the here and now and fail to consider how their actions today will impact them later on. After all, the future seems like such a distant place, and it’s easy to disregard future problems as low priority. However, “someday” eventually becomes “today”, and the consequences of all your past actions and decisions will inevitably catch up to you, for better or for worse.
Many investors have ambitions of having long, successful investment careers, but if they want to do that then they’ll need to know how to carefully consider their next moves by thinking well into the future.
Our Human Disposition for Short-Term Thinking
While it’s easy to tell someone to think for the long term, the reason why this is much easier said than done is that our brains are hard-wired to think about the here and now. We’re predisposed to want immediate gratification as opposed to toughing it out for a potentially bigger reward in the future.
Put simply, the reason for this is because we have two major regions in our brains (broadly speaking): one that controls our emotions, and one that controls our logical thinking.
When making decisions, both regions try to influence our thought process, but many times the emotional temptation outweighs our logical thinking. We know that too much sugar is detrimental to our health and that we should moderate our consumption of it, but having your favourite dessert all to yourself is most likely very hard to ignore.
This constant tug-of-war between the emotional and rational parts of our brains presents a major challenge to investors, especially when it comes to long-term thinking. Part of us knows the importance of anticipating the future, but another part of us wants to see tangible results right away.
Despite this, investors must learn to keep their emotions on a tight leash and do their best to make logical decisions. This doesn’t mean investors need to be emotionless robots, but instead, resist the emotional part of their minds from completely taking over.
Now, it’s easy to say “Adopt a long-term mindset” or “Learn how to think far into the future”, but in practice, this is typically much easier said than done, and it certainly requires a fair bit of effort to fully master.
What Happens if We Focus Too Much on the Short Term?
Before we continue our discussion on why long-term thinking is so integral to an investor’s success, let’s first take a look at what we’re trying to steer away from, being too caught up with short-term thinking, and the consequences of what happens when we don’t.
There are a plethora of reasons why bad investment decisions are made, but an arguably major contributor is the fact that some investors are hyper-fixated on the present to the point that they forget that their actions have consequences, if not now, then definitely later.
There is no shortage of historical examples to choose from that demonstrate how quickly investors take action without thinking about how it will impact them later on.
Shortly after the COVID pandemic was declared and lockdowns were ordered, financial markets quickly tumbled, and many investors were just as fast to partake in panic selling.
What these panicked investors failed to realize was that they may have inadvertently let go of high-quality holdings that were simply being dragged down by the mania, not because they suddenly lost their merit. This turned out to be true as most equities returned to their pre-pandemic price, and those investors would’ve had to re-purchase their previous holdings at a major loss.
Throughout 2022, the major headline on many investors’ minds was inflation and the possibility of a recession happening. Any time less-than-stellar inflation data was released, or whenever the dreaded “R” word popped up in major discourse, markets were quick to fall and investors were quick to start panicking, making major changes to their portfolios.
In March 2023 the US experienced a rapid-fire succession of bank failures, the most high-profile of which were the collapse of Silicon Valley Bank, Silvergate Bank, and Signature Bank.
These collapses sent markets tumbling, with Canadian banks losing nearly $19.7 billion in market value following the collapse of SVB and a mass selloff of US bank equities. Many investors were quick to sell their bank holdings, even if the bank equities they owned weren’t directly impacted by the fallout of these bank failures.
No matter how many examples we go through, the same observation can be made: time and time again investors are quick to jump the gun and insist on taking a “do something now, ask questions later” approach. They don’t care what they do – as long as they respond to an immediate threat, they can rest easy, or so they think.
Every move an investor makes has consequences, and what appears to be a sensible move at the time may end up unfurling in unintended ways later on. How many investors throughout history have needed to correct mistakes in the present due to something they did in the past?
Looking at the examples we discussed, think about how many perfectly fine portfolios were ruined because investors acted too hastily when tunnel vision took over and how long it took for them to realize what they have done.
Such is the danger of being too focused on the here and now, yet it is a trap investors repeatedly find themselves falling into.
Why Long-Term Thinking Matters to Investors
Imagine one of your big investment goals is to ultimately pass on your portfolio to your children, serving as the basis for generational wealth for your descendants. Creating generational wealth is a tall task that requires lots of careful planning, informed decision-making and is something that takes several years to craft. All it takes are a few bad decisions to derail your efforts.
Perhaps you’re more interested in philanthropy, so you plan to donate all your investments to various charities upon your death. Therefore, you want to ensure your portfolio grows as large as possible before you ultimately pass on from this life.
What sort of investments should you make? Which strategies should you implement? What sorts of contingencies should you establish? These are important questions that can’t sufficiently be answered if you limit yourself to just the present.
This is where long-term thinking enters the picture.
Mastering how to think long-term is so invaluable because it forces an investor to stop and seriously assess how their choices will unfold over time. A seemingly trivial decision may have some very serious repercussions later on – by learning to think far into the future, an investor can decrease the likelihood of making a bad decision in the first place.
Looking at our previous discussion of hyper-fixating on the short term, the argument can be made that many of the problems investors run into can largely be avoided if they knew how to stop and spend just a bit of time thinking about what lies ahead for them.
Now, it’s important to point out that long-term thinking isn’t the same as clairvoyance. Just because you think about the consequences of your decisions many years into the future doesn’t mean they will turn out as expected – circumstances change all the time, and there are some variables well beyond an investor’s locus of control.
Rather, the idea behind long-term thinking is to make sure the choices you make today take into consideration as many potential outcomes as possible, not just the ones that may happen tomorrow but also ones that may transpire many years down the road. The hope is that the decisions you go with have the highest probability of achieving the future results you want.
Thinking about the long-term is important, but that doesn’t mean short-term thinking is something to be avoided entirely.
Balancing Long-Term and Short-Term Thinking
When setting goals for yourself, a popular methodology that’s often talked about is to create S.M.A.R.T goals, that is, goals that are: Specific, Measurable, Achievable, Relevant, and Time-bound. On the other hand, some people set very big, challenging goals for themselves, usually over a long period: these are known as stretch goals.
S.M.A.R.T and stretch goals may sound mutually exclusive, but they aren’t. In fact, a common strategy is to use them in tandem.
For example, say your stretch goal is to one day summit K2. To achieve that, you break it down into hundreds of smaller S.M.A.R.T goals that pertain to your training, nutrition, and other aspects of preparation. Over time, these small, S.M.A.R.T goals add up, allowing you to achieve your big goal of reaching the summit.
When it comes to investing, the same idea applies: thinking about and planning for the long term is crucial, but that doesn’t mean investors can afford to ignore what’s currently going on around them.
This may seem contradictory to our earlier discussion about short-term thinking. However, we made an important distinction: short-term thinking isn’t an inherently bad thing, being too caught up in it is.
So, while many investors have a tendency to hyper-focus on the present, the opposite can also happen: being so focused on what lies ahead that they don’t respond to what’s currently going on around them. It’s important to think about the future, yes, but it’s equally as important to remember we don’t live in it – we live in the present, and so we make decisions on what we know and can do today.
Let’s go back to our example of passing on your portfolio to your children to establish generational wealth. This is a solid long-term vision to have, however, this long-term thinking is pointless if you’re currently making very bad investment decisions, your portfolio is currently performing very poorly, and have repeatedly failed to turn things around. If you don’t correct what you’re doing right now, then you’ve already jeopardized your future.
Put another way, it’s important to set your eyes on the future, but you also need to keep your feet on the ground.
Therefore, investors must learn to strike a balance between thinking about the present and learning to think about and plan for what lies ahead. Thinking about big, long-term investment goals is important, but we work towards those future goals by acting in the present.
Striking that balance is something investors will eventually learn and master with time and experience.
Wrapping Up
If you want to be an investor for many years to come, then part of your preparation must include learning to think far into the future and resist the natural tendency to only focus on today.
Long-term thinking is important for any investor with big goals for the future because it forces them to seriously consider the consequences of the actions they take today. One misstep and you run the risk of failing to achieve your future investment goals.
Although thinking and planning for the long term are indispensable, this doesn’t mean investors can now afford to ignore the present altogether. Rather, investors must find the right balance between short-term and long-term thinking.
Setting your sights toward what you one day want to accomplish is important, but the actions you take and the decisions you make today will determine whether you achieve those future investment goals or not.
