Investors Are Always Compensated for Their Behavior


“The dice of God are always loaded.” – Ralph Waldo Emerson

Investors experience no gain without loss; and no loss without gain. Finance is not immune from the universal laws of nature.

For instance, a wealthy person may enjoy caviar but cannot digest it. A poor person may be in perfect health with a ravenous appetite, but cannot afford food.

Ralph Waldo Emerson stated, “For everything you have missed, you have gained something else; and for everything you gain, you lose something else.” He goes on, “The whole of what we know is a system of compensations. Every defect in one manner is made up in another. Every suffering is rewarded; every sacrifice is made up; every debt is paid.”

This applies to the actions of individual investors. While many will take action to avoid pain, they will experience it in another form. Others will enhance momentary pleasure with poor short-term decisions and find themselves compensated with long-term pain.

Emerson observed, “In the animal kingdom…no creatures are favorites but a certain compensation balances every gift and defect. …If the head and neck are enlarged, the trunk and extremities are cut short.”

Investment anguish is only temporarily delayed. When it is unleashed it emerges in all of its pent up fury. The longer it takes to emerge, the more vicious are its ramifications.

Economists living in ivory towers may call this opportunity costs. Emerson’s description is much more poetic and powerful:

“The absolute balance of Give and Take, the doctrine that every thing has its price — and if that price is not paid, not that thing but something else is obtained, and that it is impossible to get any thing without its price.”

All decisions regarding money have a price. It is impossible to avoid paying the fee. It is just a question of when you will be required to pay it.

Here are some actions investors take that they believe defy the universal laws of compensation.  Many investors:

  • Relish the perceived stability of investing in their home country or owning a large amount of their employer’s stock. The law of compensation states they will eventually feel equal pain with missed opportunity cost, by failing to diversify; or through a large loss of investment capital.
  • Enjoy the safety of stashing large investment sums in the bank. They will eventually be compensated with the pain of an inflation-ravaged bank account and destruction of their purchasing power.
  • Find comfort in following the investment advice of friends or co-workers, who have little knowledge of the markets. Compensation will arrive in the form of great future pain due to  financial decisions that were based on emotion and not evidence.
  • Feel relieved pulling their money out of the market during severe corrections. Compensation appears with the sums lost due to a consistent buy-high, sell-low investment philosophy.
  • Get an adrenaline rush from charging things they cannot afford. Their compensation will cause extreme duress in the form of a 20% interest rate and immense final costs.
  • Delight in the temporary joy of buying their children expensive gifts. Compensation will take the form of enormous guilt due to empty college savings accounts.
  • Experience the bliss of extra money in their paycheck to purchase wants rather than needs. Compensation will appear by working in a torturous job for several extra years due to neglecting to contribute to a company-sponsored  retirement plan.

Understanding the ebbs and flows of decision-making is vital for success in investing; and in life, for that matter.

Though we may be able to temporarily run from these laws, we cannot hide.

Think of this as a universal tax. We pretty much pay taxes on everything we do. Often this does not involve writing a check. Delays while traveling and arguments in an otherwise happy marriage are perfect examples of this. Very successful people often have stressful lives.

Paying the short-term price in investing is much cheaper than the long-term compensation you will owe as the penance for your bad decisions.

As Emerson noted, “Punishment is a fruit that unsuspected ripens within the flower which concealed it.”

There is no escaping this fact no matter how hard you may try.

Source: Compensation by Ralph Waldo Emerson