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Time is of the essence – Ultimately, everyone is likely to invest for the same underlying reason

23/12/2015

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

So why invest? At one level, of course, the question could almost inspire a different answer from every person you ask yet, ultimately, the underlying reason is likely always to be the same. As this interesting Motley Fool piece points out, people essentially invest because they want to be in a position to ‘buy time’ – they want to spend less of it working and more of it doing what they want. 

As it happens, no less an economic thinker than John Maynard Keynes had high hopes that future generations – in other words, us – would be well-placed to do just that. Back in 1930, in the depths of the Great Depression, he wrote an optimistic and inspiring essay called Economic possibilities for our grandchildren, which is well worth a look. 

OK, so the intricate joys of compound interest and the huge part it plays in the accumulation of capital may not be everybody’s glass of mulled wine but, as Keynes pointed out, in terms of raising standards of living, what it had done for people and what he believed it would go on to do for people in the future, should not be underestimated. 

Keynes’s predictions that living standards would be significantly better than they were when he was writing have effectively turned out to be correct. He expected that industries such as agriculture, manufacturing and mining would be able to operate with a fraction of the people they employed in the 1930s. Seeing, for example, the 400-ton mining trucks available today, he would not be disappointed. 

Where he may well have been disappointed, however, is in relation to another of his predictions: that people today would all be idle because our “Adam’s wants” – that is, our essential needs of food, water, shelter, healthcare and so on – would all have been satisfied, leaving us to wonder how to fritter away our time. In effect then, Keynes was imagining a world populated by oligarchs and WAGs. 

Not that he was necessarily on the wrong track. As the following chart shows, work that in 1947 would have taken a 40-hour week could by 2012 be completed in about a quarter of that time. The snag, of course, is that not all human wants are “Adam’s wants”. Many, as Keynes put it, are “relative” wants – that is, people want things to make them feel different to or better than their fellow men. 

People can thus end up working long hours to pay for expensive holidays they hope may compensate for all the time they were not at home enjoying family life, or to buy a super-charged saloon car that spends most of its life in a railway station car park. No matter how wealthy they are, most investors – who by definition have met their “Adam’s wants” – would be happier if they had more time. 

 

Source: BLS

That brings us back to where we came in – why people invest – and the good news is that value investing can help. Call it a tiny Christmas miracle but, if you invest with a value methodology and mind-set, you should be able to compound your wealth slightly faster and, as Keynes showed, small benefits in compounding over time can build up to great effect. 

What neither the power of compounding nor the wonder of value investing can do, however is change human nature (even if the latter actively plays off it) or what people want. Achieving that is all down to the individual and, at this time of year, when people’s thoughts often turn more readily to family, we thought one way of making our point is by considering the amount of time we spend with our parents. 

What the following chart shows – and, while this may initially seem a little depressing, please do bear with us – is the percentage of time a child spends with their parents, on average, over the course of their lifetime. Obviously most of that time will be towards the start of the child’s life, meaning that, by the time they turn 20, they will have spent 90% of the time they will ever have with their parents.

 

Source: BLS

Equally obviously, as this is only an average, different people will have different experiences. Yet the interesting thing is that, as children or as parents, we do have some control over the slope of our own version of the above graph – just as we have some control over the slope of a very similar graph that could be created to illustrate our principle theme of investing to ‘buy time’.                   

To put it another way, by setting your expectations at an appropriate level, you should be able to give yourself a better chance of spending more of your time as you would wish. Value investing can do many things – certainly history suggests it should be able to help you compound your money faster – but it cannot tell you how much you need to save for your future. 

Depending on their priorities, of course, the amount of money people think they need for their future can be very different from what they actually need. As this article explains, one of Warren Buffett’s less well-known pearls of wisdom is to think hard about what is important in your life – and then to think even harder about what is not important. 

The important elements of our life – family, friends and time, for example – can seem all the more so at Christmas. From all of us here on The Value Perspective, we wish you a very happy one – and a happy and prosperous 2016.

 

Author

Ian Kelly

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth. 

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