This week, I came across two examples of delayed gratification.
One was a conversation with a friend.
Arun is an entrepreneur. As with any start-up, he faced his share of struggles and obstacles. During such phases, he and his family would cut down on visiting restaurants, going out for movies and other social events. But the compromise was never, ever on his savings. His savings rate continued unhindered, and the sacrifices manifested in other areas. Little wonder that today he is so successful – professionally and financially. In my personal circle, he is a vivid representation of delayed gratification.
I then came across this article in Morningstar.com.
Flight attendant Bianca today is financially independent even though she lost money on properties post the housing crisis of 2008. Over many years, she went from earning $14/hour to $60/hour, and is a firm believer in delayed gratification -- making sacrifices now to enjoy the benefits later.
Delayed gratification is worth discussing in an age where instant gratification is the norm, not the exception. And no, I am not just throwing cute metaphors at you.
Delayed gratification feeds into the ability to manage your finances in numerous ways.
It can control the gambling instinct, the urge to max your credit card, the decision to persist with your savings strategy when the market is collapsing, the resolve not to compete with the neighbours or social circle in the realm of materialism, the discipline to save for your retirement, and so on and so forth. It can yield tremendous returns if you can exercise self-control and a tolerance for waiting.
Investor Jean Marie Eveillard alluded to it when he coined the phrase capacity to suffer. It was Tom Russo who is credited with publicising it.
An example that Tom Russo often has cited is one where Howard Schultz, the chairman of Starbucks, was speaking to investors about the company’s plans in China. A young analyst kept asking him when they would show profits in China. Schultz responded with: How big do you want us to be?
The dialogue went back and forth: When will you show profits? How big do you want us to be? When will you show profits? How big do you want us to be?
Schultz was making a point. If you want us to dominate China, then we cannot show profits for a long time. But will end up with a dominant position in an important market with moat-like characteristics.
Many years ago, researchers of four universities studied this. And David Laibson, an economist at Harvard University, shared his insight. “Our emotional brain has a hard time imagining the future, even though our logical brain clearly sees the future consequences of our current actions. Our emotional brain wants to max out the credit card, order dessert, and smoke a cigarette. Our logical brain knows we should save for retirement, go for a jog, and quit smoking.”
Practical ways to practice delayed gratification when it comes to your finances.
Delayed gratification is a much more sensible route, and probably easier, when you have a sense of purpose. It will help give you the tenacity to harness self-control when it comes to your finances.
Write down your goals as clearly as possible. When you have articulated and understood what it is your want, you will be empowered to delay gratification. Since you will always grapple with limited finances but unlimited spending opportunities, you need to prioritize what is really important. Have a vision of what you are saving for.
A life with too much self-control can be as unfulfilling as one with too little. Reward yourself. Give yourself leeway to splurge occasionally. You can cut down on eating out, but don’t give it up altogether. Or maybe your goal is a reward, like a great vacation. In that case, shift your focus. Focus on the reward, not on the pain of giving up something.
Do what works for you; don’t follow blind suggestions. For instance, Morningstar’s behavioural finance economist, Sarah Newcomb, says that we always hear about how if we didn’t go to the coffee shop every day we could save amazing amounts of money. But have you ever considered that the reason you go to the coffee shop probably has nothing to do with caffeine? It may be about connecting with friends or experimenting with different coffees or hanging out in a place with a nice buzz to just read a book, have a coffee and unwind. If you opt for delayed gratification blindly without tracing it back to the need that you’re meeting, the expense goes away but the need doesn’t.
In The Joys of Compounding, investor Gautam Baid discusses this concept specifically with regards to disciplined investing. Here are a few insights from the chapter titled The Key to Success in Life is Delayed Gratification:
- In equity investing, it pays to have a long-term view.
Equity investing is like growing a Chinese bamboo tree. One should have passion for the journey as well as patience and deep conviction after planting the seeds. The bamboo tree takes more than 5 years to start growing, but once it does, it grows rapidly to 80 feet in less than 6 weeks. In the initial years, compounding tests your patience and in later years, your bewilderment.
- The ability to have a long-term orientation is now a bigger advantage than ever before.
Embracing deferred gratification is what leads to the single biggest edge for an investor. Human nature makes it very difficult to utilize this edge. This difficulty is the very reason the edge exists, and since human nature will never change, this edge is a durable one for those who possess the right temperament to capitalize on it.
- The ability to delay gratification is a better indicator of future success than raw intelligence because the former is an important part of emotional intelligence.
The short-term mindset that is all-pervasive in the market creates lots of irrational buying and selling for all sorts of reasons that have everything to do with the short-term direction of the stock but nothing to do with the long-term value of the business. Since the financial community has an ever-increasing focus on the next quarter, a long-term orientation is a structural competitive advantage for an investor, one that is likely to strengthen over time.
Charlie Munger: “Great investing requires a lot of delayed gratification”.
It’s worth pondering on this, as against instant gratification, as it has reverberations on every aspect of our financial lives and is the prime key to building wealth.