Monday, 5 January 2015

Investing Advice from Astronaut Chris Hadfield's Guide to Life on Earth

We'll admit it straight off. In his excellent book An Astronaut's Guide to Life on Earth, Canadian astronaut Chris Hadfield gives absolutely no direct advice about investing. What follows is our own interpretation of his general advice that resonates strongly for the investor. Hadfield's tremendous success suggests it is worth heeding what he says, which is based on his experience and life story.

Outstanding success comes from a modicum of talent plus many years of sustained, focused effort towards a goal - As Hadfield puts it, astronauts are not born, they are made. People do not become astronauts by accident - "I didn't walk into JSC a good astronaut. No one does." In a Canadian Business interview in 2014, he added, " ... you are the result of your own decisions. If you want to become somebody else then start making some different decisions, and whittle yourself like some sort of perpetually shifting sculpture into who you want to be".

Investors are not born good either. The first thing we note is that talent is the lesser element. The very wealthy investor Warren Buffett rates the talent portion even lower for investing - "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." You don't even need to be as smart as an astronaut!

The second idea to note is that getting to the top of the heap does require huge amounts of effort. But not everyone needs or wants to be a superstar. Those who are not prepared to do so are better off doing what Buffett recommends to his heirs - low cost index funds that track the market.

Risk taken should be outweighed by the reward - Hadfield puts it thus: "... the only good reason to take a risk is that there's a decent possibility of a reward that outweighs the hazard". Taking risk does not automatically lead to reward. In the case of astronauts, thrill-seeking risk-taking is not done since the probable result is quick death. Whereas investors are only likely to see their money disappear, the desirable principle is the same. A critical task is to understand, manage and reduce risks. It is the reason we have often written about risk in our Guide to Self-Directed Investing.

The power of negative thinking, Hadfield's inversion of the famous book title and philosophy of Norman Vincent Peale, tells us to focus on avoiding the downside. Anticipating and avoiding problems that can cause loss of life is astronaut mantra. The investing version is to focus on not losing money, as espoused by legendary investor Benjamin Graham in his classic book The Intelligent Investor and by value investors to this day.

Sweat the small stuff - This next reversal of a popular saying by Hadfield refers to the fact that small defects can be deadly, perhaps the most famous example being the defective O-ring that was at the root of the Challenger disaster. For investors a parallel can be found in the seemingly innocuous management expense ratio fees of mutual and exchange traded funds. A 2% or even a 1% difference doesn't seem like much but the effect compounds mightily over years and decades, causing disastrously lower returns for investors as we wrote about in 2011. Investors must pay attention to costs.

Prepare a plan and stick to it - We would be tempted to say that this idea is so simple that it "isn't rocket science". Except it is! Every space launch is preceded by years of meticulous planning. Every step is written down, including especially what to do in case of malfunctions and when to stop a launch. And the astronaut launchers follow it very strictly, despite the disappointment and frustration at delay and having to start over. Similarly, investors are wise to have a written investment policy that lays out how the portfolio will be constructed and managed, including rebalancing. One big challenge for investors is to actually follow the plan at critical highly stressful moments, such as during the autumn of 2008 when stocks were plummeting. That was the key moment to rebalance from bonds, which kept their value much more, to stocks.

A thirst and willingness to keep learning forever is essential - No matter how experienced the astronauts, they must always be honing their skills and knowledge. Much of the learning comes from noting and analyzing mistakes and deciding how to do differently and better. The investor can profitably do the same.

Hadfield notes that early success is a terrible teacher - "... you have to be competent ... before you can be extraordinary. There are no shortcuts, unfortunately." Astronauts, like everyone, tend to think they know it all if they succeed right off the bat. Investors who have a big winner right away think it's their own savvy whereas it's probably just luck. Investor Buffett puts the point thus: "No one has succeeded without going through their own failures at some point."

Overcoming fear is possible - Supreme irony for an astronaut, Hadfield tells us he has a very strong natural fear of heights and falling! Yet, he has managed to control and overcome this, through a mix of knowledge about how things actually work that gives him confidence they and he won't fall, and of the huge number of simulations the astronauts do. As he points out, anyone would be terrified if they went straight into the launch seat in a rocket. The fear from a feeling of helpless lack of control was more or less eliminated through figuring multitudes of possible things that could go wrong and what actions they would take along with countless hours of practice and simulation that de-sensitized the astronauts to the cramped capsule and the movements.

The fear parallel for investors is the anxiety during extreme market downs. Unfortunately, there are no investing simulators, so it is only years as an investor that allows us to absorb the sensory experience of crashes. But the other elements can be implemented - developing knowledge of the history of market movements (e.g. our post on Investing Risk: Historical Worst Volatility, Business Cycles, Crashes and Crises) and having a plan that tells us exactly what we should do under the various possible circumstances.

Good and bad luck will still happen for reasons we can never control so we should enjoy the ride and be happy with ourselves - Hadfield never knew for sure that he could actually realize his life dream to fly in space. He determined to enjoy the preparation itself, no matter what eventually happened. As he says and others have said before, outside circumstances and events are beyond our control, just as financial markets are for all investors, but we can decide how we want to react and be happy nevertheless. We can do our best and be satisfied with our own effort. That seems a good outlook to adopt.

Further viewing just for fun: The Space Oddity music video performed by Chris Hadfield on the International Space Station.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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