Halo Effect

This post has nothing to do with Brexit, UK’s ego, or the unfairness in life that the older generation always decides on things the younger generation has to live with.

so unfair

But then, maybe it does …

Let’s visit another continent for a while.

Who has not heard of Warren Buffett?  For more than 10 years, one of the richest men on the planet.  But did you know that of his current roughly $60 billion net worth, $57 billion was added after his 60th birthday?

If Buffett had started saving in his 30s and then retired in his 60s (like many of us typically do) still achieving his roughly 20% return per year, you would have never heard of him.

His secret is time.  He started at the age of 11 and is now 84 years old.  70 over years of compounding really do make a difference.

So, be careful when you encounter human stories.  Ask for the facts and the statistical distribution behind them.  You can still be motivated by the story; however, you can then put it into the right context.

We should remind ourselves not to fall for the general inclination to draw a specific conclusion based on general impressions.halo-effect

This Halo Effect pervades the business world.  For example we tend to observe financially successful companies, attach attributes (e.g., great leadership, visionary strategy, tight financial controls) to that success, and recommend that others embrace the attributes to achieve their own success.  Even researchers who study management follow this formula and rarely recognize the role of luck in business performance.

And then the media often perpetuates the halo effect.  Successful individuals and companies adorn magazine covers, along with glowing stories explaining the secrets of their success. It also works in reverse, as the press points out shortcomings in poor-performing companies.  The press’s tendency to focus on extreme performance is so predictable that we can use it as a reliable counter-indicator.

Any time you see an approach of offering secrets, formulas, rules, or attributes to achieve success, you can be sure that someone is selling you a quack remedy.

Which brings us back to Warren Buffett.  Do his secrets and rules fall under the category of quack remedy?  I don’t think so.  His rules appear to have withstood the test of time.  But then just looking at him we might be falling prey to the Survivorship Bias or maybe his extraordinary returns might simply regress to the mean in the next few years.

Could you replicate his success?  

Hardly, because I believe my reader might not have 70 years left?  No worries, just start investing on behalf of your child—on the basis of the asset that he/she has plenty of.  That asset is commonly called time.

Thinking in the Future Tense.

5 Comments

  1. hahahaha… I think ur wealth tree can last much longer.

    Anyway, better to leave the kids with basic education fees n abundance of knowledge rather than just leaving the kids a sum of money without educating them life outside school!

    Of course they must learn by themselves but discipline on savings, frugality, working hard, respect, responsibilities, discipline etc is still very much the guidance of parents..

  2. Is a problem with glass half full depending which side you are. The older generation has already lived more than 40 years under EU. They know. Is time they save the young !

    • Hi Cory,
      Agreed, there are always pros and cons to everything.
      You are very idealistic to believe that they had the young in mind when they voted. And who of those 50 and above voters do still remember how ‘good’ life was before UK joined the EU in 1973? I am convinced the vote was all about the Un-united Kingdoms ego.
      Maybe in future someone could propose a weighting factor linked to the age of the voter when it comes to such a long-term decision. Votes of people below 40 are weighted with 1.1 and people above 60 are weighted with 0.9. Just an idea. haha

      • Hi Andy,

        I doubt the older voters have in mind the younger ones esp more in Western cultures!

        Maybe you are exception to think that you are planting for your next generation! hahahaha…

      • Hi Rolf,

        Actually I am more Asian in that regard. I told my kids the other day that a do expect a monthly allowance of 5 K once they start earning money. The younger generation has to take care of the elder generation. It is pay-back time.

        Have to start early to prepare them for my expectations, right?

        Maybe that could be the reason why I have been able to “afford” to retire in my mid forties. My savings only have to last for another 5 to 10 years. Juuust kidding. No worries, I am still planting seeds.

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