This column is going to wax a bit philosophical. Stay with me; I think it will be worth your effort. You don't really understand time. By "you" I mean humans in general.
This has great significance for investors. They often misapprehend time, are seemingly unaware of its importance and can't conceptualize it over the long term. Pardon the circularity, but you exist in the here and now, and – for want of a better phrase – are stuck in the short term.
The past is a hazy set of fallible memories and biochemical impulses, often tinted by the warm and rosy glow of nostalgia. The past can also be darker, traumatic, painful, repressed, still haunting its survivors. Those experiences, often mixed up with one another, colour our perspective.
It's no surprise that our experiences affect expectations for the future. Nor does one need much imagination to see the ramifications the past has for investors. Too many good experiences, or too many bad ones, will change the expectations and risk tolerances for those who put capital to work in risk assets.
When considering the future, it is important to recognize that if one considers a possible outcome, it is merely one out of an infinite set of possible outcomes, all unknowable.
Many think they can anticipate what will happen in the future. We divide these "seers" into two groups. The largest group consists of much of humanity, and these are the ones best described as delusional. Evidence and experience – and, of course, their own published forecasts – teach us these folks haven't the slightest idea of what may occur, much less what will occur in the future. Pick any subject at all, and, as we have shown too many times to reiterate here, they have no idea what will happen next. Those of you who believe you do know what will happen, please contact me directly so I may disabuse of your fantasies.
There is a very tiny percentage of humans who actually can make out, through the haze of the present, a vision of the future no one else seems to be able to see. They discern hints of a significant future event or a societal shift missed by everyone else.
All of which brings us back to investors. It is of the utmost importance to understand the point in time in which you stand. Your perception of time has been coloured by past experiences and fools you into imagining you know what comes next. This is rather critical because so many investment decisions are made through fogged-over lenses.
The phrase, "The days are long but the decades are short" does a masterful job of revealing the subjective experience of the passage of time. We see this in investors who have an inability to do less, to let time work for them, to just be. Some call it a lack of patience, but I see it as more fundamental cognitive issue.
Humans have difficulty simply being a client who lets time work as an agent on their behalf. Perhaps mortality is why humans treat time as an enemy, rather than as an ally. Perhaps it is the way time is experienced. Regardless, it seems that only mathematicians have an appreciation of time, based on their understanding of the power of compounding. Some people grasp it intellectually, but few get it emotionally.
For those with capital at risk, it is crucial to take all of this into account. The future is just a set of statistical possibilities and – to the astute – a set of outcomes of lesser or greater probability. Understanding this can make all the difference.
Barry Ritholtz is founder of Ritholtz Wealth Management, an asset management and financial planning firm.