The investment playbook #1
Reading time: approx. 8min
Preamble
In American football, a playbook is a strategy book with plays, formations and tactics that helps coaches and players prepare for games and communicate on the field. Although the concept of the playbook originated in American football, it is now also used outside of sport in areas such as marketing and project management. In the sitcom How I Met Your Mother "the playbook" is a legendary book created by Barney Stinson that contains ingenious tactics and strategies for seducing women.
Isn't it tempting to have some kind of playbook around investing? That's exactly what this post and future posts with the "investment playbook" theme will be about. It will not be about strictly formal investment concepts, fundamental analysis or ratios but rather anecdotal concepts and ideas that can be applied well to investing. My aim is not only to deal with abstract concepts, but also to explain them using concrete examples from everyday life. Just like a football playbook, the investment playbook is designed to help you make better decisions, regardless of whether you are Team Value, Team Growth, Team Dividend or Team Crypto.
§1 Positive habits lead to a positive outcome
I am currently 34 years old and started smoking at the age of 25 out of my own stupidity. At first it started with the well-known party cigarette, then I developed the habit of smoking cigarettes when I had a little too much alcohol. Eventually, drinking a little and smoking a cigarette went together. In a gradual process, I didn't want to admit to myself for a long time that I was already looking for reasons to smoke at this point: "Today was such a stressful day, I'll sit on my balcony and have a smoke," was one such sentence, for example. After a long time of proudly answering "no" to the question "do you smoke?", I eventually realized: yes, I do smoke.
When people asked me how much I smoked a day, I didn't know exactly and always answered casually with "no more than 5 or 6", although I was aware that it was probably more if I really counted. So I got more and more used to the fact that cigarettes were part of everyday life and also took the famous cigarette breaks in everyday life. I was a smoker. The "5 to 6 cigarettes a day" quickly turned into 10, then 15 and even more. Since I was a non-smoker for most of my adult life, I could never really identify with smoking, and in my head I kept telling myself that I was actually a non-smoker and that I could quit immediately if I wanted to.
Of course, I couldn't just quit like that any more. At least not without potential withdrawal symptoms. I didn't feel bad at that moment: I didn't feel the negative effects on my body yet. I felt sociable and could always find good reasons to take short breaks from my stressful everyday life.
At around the age of 30, I started to have my first doubts. I increasingly felt the effects on my health, such as coughing fits or shortness of breath. People around me increasingly asked me why I was smoking all of a sudden, even though I had never smoked before. In my mind, I was still a non-smoker, even though I had been smoking for about 5 years. The first dissatisfaction with my existence as a smoker spread and the vague idea of quitting smoking developed.
The first attempts to quit failed miserably. Simply smoking the last cigarette and then never touching a packet of cigarettes again didn't work for me at that time. Frustrated, I continued to smoke. Soon it was 20-25 cigarettes a day, which made my symptoms worse, which of course led to more frustration and ultimately even more cigarettes. All the good arguments like "think about your health" or "look at the money you spend every month" didn't work for me at the time. "I'm only 30, I can quit later," I thought to myself. Of course, I subconsciously realized that this thinking would only push the problem further back.
Time jump. It's May 2023, I'm 34 years old and smoking a cigarette on my terrace. Several attempts to stop smoking have failed over the past few years. I recapitulate my situation. I am dissatisfied with being a smoker. I start to ask myself questions, which can be summarized in the following 3 questions:
1) Why did I start smoking?
2) What is stopping me from quitting?
3) How will I manage to stop?
It's not that easy to honest to find honest answers. My answers to the above 3 questions were as follows:
1.) Why did I start smoking? It started with a bad habit (smoking at parties). By constantly repeating this negative habit, it became a negative development (smoking more, inventing reasons for smoking). At the end of this negative development was the negative result: I was a smoker.
2) What is stopping me from quitting? Of course, it seems that nicotine addiction is the main reason for not quitting. However, during my time as a smoker, I always managed not to smoke for several days at a time. Nevertheless, I started again afterwards. Why? It's not primarily my nicotine addiction that stops me from quitting: it's my negative habits and associations that make it so difficult for me day after day:
- After a meal --> smoke a cigarette
- Stress in everyday life --> I take a break to smoke
- Waiting for the bus --> I bridge the waiting time and smoke
- Drinking alcohol --> I smoke with it, etc.
It is precisely these connections, which I have trained myself to make through bad habits, that have made it so difficult for me to stop smoking. The word "trained" is really very appropriate in this case, because our brain learns behaviors through constant repetition. At some point, the processes happen almost automatically without thinking; or do you still consciously think about which way to turn when you turn in your car?
3) How do I manage to stop? I realized that I can only really stop if I break these bad habits and replace them with positive habits. True to the motto: "Positive habits lead to positive changes". These positive habits then lead to a positive development (I keep on not smoking) and finally to the positive result: I am a non-smoker.
For all those who have persevered so far and are asking themselves "Where is the connection to investing?". This is exactly where the (admittedly) long arc to the topic of investing comes in:
On June 11, 2023, I made my last cigarette on June 11, 2023 and have now been completely smoke-free for almost exactly 4 months. I have unlearned the negative habits I had trained myself into and also created a positive incentive to stay smoke-free: Every week I take the money I would otherwise have spent on cigarettes and invest it in the world's largest manufacturer of tobacco products, Philip Morris ($PM ). I am well aware that the choice to invest the money saved in Philip Morris can be seen as controversial. For me personally, however, the following thought is appealing: I invest the money that I would otherwise have given to this company in the company instead. This turns me from a consumer of the products into an investor in the company.
Every pack of cigarettes I would buy to smoke would take the money I would otherwise have given to this company to invest in it. Additional money that I would otherwise not have available to invest. Money that pays me a nice dividend for a long time without me having to do anything for it. Money that would otherwise have simply disappeared. The amounts saved in this way can become very substantial over a long period of time, especially if you take into account the compound interest effect. In [1] you can find the "Smoke-free calculator" from Finanzfluss with which you can experiment a little. For me personally, after 10 years without cigarettes and an annual return of 5%, a sum of around 40.000€ would come together. In addition, there would probably be a dividend, which for €40,000 $PM shares would currently be around 2.100€ per year or €175 per month. Considering potential dividend growth, this amount could of course be significantly higher in 10 years' time.
Conclusion
Using the example of my personal process from non-smoker to smoker and back again, I have illustrated how quickly negative habits can become entrenched and lead to a negative process, at the end of which there is a negative result. If you replace these negative habits, however small, with positive ones and also create the right incentives, these positive habits can "compound" over a longer period of time and ultimately have a major effect. For me, it was the path to becoming a non-smoker, which is now made even sweeter by my savings plan. For you, it might be other things like driving a more economical car, taking on a part-time job or even starting to invest money every month. Every little positive habit -- like a monthly savings plan of 20€ on a world ETF* -- can have a big positive effect for you personally.
Yours
Michael Scott
* In 40 years, with an annual return of 7%, an amount of approx. 48,000€ could have been accumulated. See [2].
Sources:
[1] Financial flow: https://www.finanzfluss.de/rechner/rauchfrei-rechner/
[2] Financial flow: https://www.finanzfluss.de/rechner/zinseszinsrechner/
