ELF
Capital Management, LLC
(Endowment
Like Fund Management)
October
5, 2011
This is the August / September 2011 ELF
Capital Management, LLC Market Letter.
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The Folly of Impatience
Have you ever gone
grocery shopping or entered a restaurant when you were really hungry? How did that work out for you?
It’s widely known
that hungry people order more food than they can eat – experiencing the “your
eyes are bigger than your stomach” effect.
This reaction is so common that you’ve likely experienced this kind of
impatience before. It is also a popular topic
for academic researchers. Studies show
that hungry people buy more food than originally intended (Gilbert, Grill, and
Wilson 2002; Nisbett and Kanouse 1969), have a stronger preference for candy
over fruit (Read and van Leeuwen 1998) and demonstrate less self-control (Kirk
and Logue 1997).
Impatient overeating may
only bring you brief stomach discomfort and modest anxiety from having lost self-control. However, impatience can impact us in more
negative ways. It can lead us to make
poor financial decisions, harm or destroy relationships, add to anxiety and even
harm our health. The impulse to obtain
instant gratification can do more harm than good. Indulging impatience can contribute more to
self-imposed stress and unhappiness than the brief pleasure gained.
The parenthetical
opposite of impatience is procrastination.
Whether from the paralysis of analysis or outright avoidance, constant procrastination
can also cause anxiety. Have you ever
found yourself frantically trying to meet a deadline at the last minute or waited
so long that you missed an opportunity altogether? Procrastination can foster disorder and
clutter in one’s life as well as low self esteem.
In digging up
information for this article, I found more than enough empirical research on
the cause and effect of impatience.
Apparently, there is and has been considerable interest by marketing and
consumer behavioral academics about this topic.
And on the topic of procrastination, not much study at all.
Why do you think
impatience is such a hot topic for research?
Controlling
the Minds of Consumers
Among the many
reasons for studying consumer behavior, a primary use is to help business and
political professionals improve their marketing strategy. And impatience heads the list of consumer
behavior topics.
One open source study
I found was in the August 2005 Journal of Marketing Research. Professors Chen, Ng and Rao set out to
reinforce the belief that people from Western cultures are less patient than
those from Eastern cultures. While the
research was insightful, I found more interesting the introduction they
provided. Words in [brackets] are my
own:
“Whether and how people incorporate
the future into their decision making about consumption options is a topic of
considerable interest to scholars of marketing and consumer behavior from both
a normative [what
is commonly observed] and a descriptive [more
detailed] standpoint. Normatively, the time value of money is an
integral component of standard economic prescriptions for consumption, investment, and expenditure decisions. For example, according to the normative view,
in general, people should prefer receiving money immediately rather than later
because all future outcomes should be discounted positively [valued less].
Descriptively, research has examined precisely how the future is discounted
and whether discount rates vary across situations and people. …
Discounting the future is akin to
displaying impatience. A high discount
rate implies that the future is considerably less important than the present,
and people who employ high discount rates manifest relatively high levels of
impatience, or the preference for instant rather than delayed
gratification. This impatience likely
applies to the acquisition of not only money but also other material objects,
and it is likely to be reflected in consumers’ (1) desire for quicker service
and delivery of products, (2) greater preferences for options that offer early
rather than late payoffs, and (3) enhanced willingness to pay for immediate
rather than delayed gratification. Thus, the general issue of impatience is of
substantial interest to marketing and consumer behavior.”
They are saying that
the more impatient a consumer becomes, the more likely they will pay more for
something, settle for less quality or pay more for less quality. Basically, impatience drives consumers to
make poor financial decisions.
So how do marketing
professionals instigate impatience?
You’ve heard “sex sells”, right?
Another study in the
September 2007 Journal of Consumer Research investigated this very topic. The title of Belgian Economics Professors Van
den Bergh, Dewitte and Warlop’s research paper says it all: “Bikinis Instigate Generalized Impatience in
Intertemporal Choice”.
I swear that I’m not
making this stuff up! By the way,
“intertemporal choice” is the study of the how people choose among two or more
alternatives that are available at different points in time. For example, should I save for a “rainy day”
or spend my money now?
Now, let’s take a
look at their introduction:
“Advertisers search
for a way to break through the clutter by using sexually oriented appeals in
marketing campaigns. Previous research
on the use of sexual imagery in advertising has focused on, among other things,
consumer’s brand recall and recognition, appeal evaluation, attention, purchase
intentions, and product perception. The
present study differs from earlier work by showing that the consequences of
using sexual imagery extend further than the evaluation of the product or brand
itself. In line with previous research
demonstrating that exposure to sexual cues influences economic decision making
(e.g. Van den Bergh and Dewitte 2006; Wilson and Daly 2004), we will argue that
exposure to sexual cues may affect decisions such as whether to purchase a less
expensive item that can be enjoyed now or to save for a more expensive one.
…We propose that
exposure to ‘hot stimuli’ (Metcalfe and Mischel 1999) leads to a non-specific
time perspective collapse towards the present. Based on recent neurological findings,
suggesting that rewards are processed similarly in the brain, we propose that
exposure to ‘hot stimuli’ may instigate general impatience in intertemporal
choice. We will argue that a greater
appetite causes a greater urgency to consume anything rewarding.”
This article argues
that sexual cues produce statistically significant results of inciting
impulsively impatient behavior among young heterosexual males and a more mild,
but similar effect on others. The
research paper also referred to many additional studies that discussed how
impatience can be vigorously triggered in other types of people.
Now some of you might
be saying: I know I’m being manipulated
by advertising, or by political rhetoric, or by the media. But I don’t have time to labor every decision
or read every message between the lines.
And that may be true. However,
constantly giving in to impatient behavior will likely form habits that can
harm your pockets and your health. How,
you might say?
Effects of
Impatience
Impatience can vary
in degree from one person to the next. and the effect is often negative for the
person displaying it as well as those around them. Rather than entertain you with my own opinions,
I’ll keep this in the realm of the research found.
Let me begin with a
study on how impatience impacts the unemployed.
In the July 2005 Journal of Labor Economics, researchers Della Vigna and
Passerman presented a paper on “Job Search and Impatience”:
“How does impatience affect job
search? More impatient workers search less intensively and set a lower
reservation wage
[minimum acceptable wage offer]… In this
paper we show that, if agents have exponential time preferences, the
reservation wage effect dominates for sufficiently patient individuals, so
increases in impatience lead to higher exit rates [being unemployed longer]. The opposite is true for agents with
hyperbolic time preferences: more impatient workers search less and exit
unemployment later. Using two large longitudinal data sets, we find that
various measures of impatience are negatively correlated with search effort and
the exit rate from unemployment, and are orthogonal to reservation wages.
Overall, impatience has a large effect on job search outcomes in the direction
predicted by the hyperbolic discounting model.”
Simply put, the more
impatient someone is, the more likely they will remain unemployed longer than a
more patient person.
The next two studies
focus on Type A personalities and how impatience impacts their ability for achievement
and their health.
“The Effects Of Type A Behavior
Dimensions And Optimism On Coping Strategy, Health, And Performance” by
Ashford, Jamieson and Lee. Found in the
March 1993 Journal of Organizational Behavior.
“Type A behavior
dimensions and optimism were examined as predictors of health and performance. In addition, this research also explored the
ways that Type As and optimists cope with stressful situations. The achievement striving dimension of the Type
A behavior pattern and optimism were positively related to class performance,
while the anger/hostility dimension was positively related to the health
symptom of anxiety. Optimism, on the
other hand, was negatively related to anxiety. The interaction of achievement striving and
optimism was negatively related to anxiety. Additionally, while achievement striving was
positively related to problem-focused coping, irritability showed a negative
association with problem-focused coping strategy. The results of this study provide insights for
both individuals and organizations regarding how to cope with daily stresses in
order to lower health risks and improve performance.”
“Impatience Versus Achievement
Strivings In The Type A Pattern: Differential Effects On Students' Health And
Academic Achievement” by Helmreich, Pred and Spence. Found in the November 1987 Journal of Applied
Psychology.
“Psychometric
analyses of college students' responses to the Jenkins Activity Survey, a
self-report measure of the Type A behavior pattern, revealed the presence of
two relatively independent factors. On the
basis of these analyses, two scales, labeled Achievement Strivings (AS) and
Impatience-Irritability (II), were developed. In two samples of male and female college
students, scores on AS but not on II were found to be significantly correlated
with grade average. Responses to a health survey, on the other hand, indicated
that frequency of physical complaints was significantly correlated with II but
not with AS. These results suggest that
there are two relatively independent factors in the Type A pattern that have
differential effects on performance and health. Future research on the personality factors
related to coronary heart disease and other disorders might more profitably
focus on the syndrome reflected in the II scale than on the Type A pattern.”
While it is good to
see that Type A behavior is not considered synonymous with impatience; and it
should be troubling to see that impatience is highly correlated with poor
academic and work performance, irritability, anxiety and other health issues.
Some Closing
Thoughts
In the investment
world, the most influential factors driving the decision-making process are the
emotions of fear and greed. These
emotions, together with crowd behavior, can promote impatience in novice and
experienced investors alike.
Have you ever noticed
that when the price of something that you may be interested in buying is
drifting lower or looks to be abundantly available, you feel no urgency to act
and exhibit great patience? And when the
price begins to move up, you feel more compelled to act? This is called the “scarcity effect” and is a
pretty common trigger for creating impatience among investors. However, this trigger can work against you if
you haven’t done your homework or set your desired purchase price limit beforehand.
In my opinion,
impatience makes the emotions of greed and fear work against you. This belief comes from my observation that
most of the great investors share one common characteristic – patience. Take Warren Buffett for example. His favorite saying has been: “be
greedy when others are fearful and be fearful when others are greedy”. This is Buffett’s clever way to say that we
should be buying when prices are low and selling when prices are high –
basically investing contrary to the mentality of the crowd.
I always cringe when
I read or hear market pundits promote “why
it pays to be an impatient investor”.
What they don’t tell you is that that trading or trying to time the
markets are the most challenging strategies to be successful at. They might as well parade a bikini clad model
with that ad.
Now I’m not
advocating that my reader’s become procrastinators. Procrastination has its drawbacks as
well. Yet, in the current poor economic
and investing climate we are experiencing, I thought it would be helpful to
point out that patience can be more than a virtue.
As aptly worded by an
anonymous Wiki-How contributor post:
“It has never been
easy to be patient, but it's probably even harder now than at any time in
history. In a world where messages
can be sent across the world instantly, seemingly everything is available with
a few clicks of the mouse, and a swift movement of your thumbs can take you
into a fantasy game world, it's very hard not to expect instant
satisfaction. But patience remains a
valuable tool in life. We
don't always get instant gratification, and some of the best things in life
require years of hard work and waiting.
Fortunately, patience is a virtue that can be cultivated and nurtured. It does take time to fulfill this goal, but
once this has grown into an ordinary skill for you, you certainly won't be
disappointed at what life can offer you with some spare time. You will be surprised by how boring, restless,
and lagging hours can evolve into a passing time of relaxation and peace of
mind.”
ELF’s Outlook
and Performance
If events that
occurred in 1967 made history books remember it as the Summer of Love, the
market’s action in 2011 should be remembered by investors as the Summer of
Volatility. At the onset of this summer,
I can remember discussing with one of my clients that this could very well be
an ugly summer for investing. I had no
idea how accurate those thoughts would be.
Over the past two
months, more pronounced in September, the markets have swung from euphoric to
impatient. The Greek debt drama has
garnered center stage and speculative scenarios abound on how a default on their
government debt will trigger another financial crisis and a global
recession. Worries about a slowing
Chinese economy and falling oil and copper prices have weighed heavily on the markets
as well.
Prices are reflecting
too much impatience and the markets seem to have already discounted a fairly
dire outcome. Except for the Euro-zone,
where the potential risk seems more fairly priced, markets elsewhere look
oversold in anticipation of a global recession.
We’ve been trained to think the worst when we hear “recession”. Recent history has imprinted it to be a high
drama event. It doesn’t have to be and
that outcome remains uncertain. Yet, the
markets have gone far to price in that scenario.
As for
While the Greek drama
continues to play out, it is likely that we will also continue to see
volatility in the markets. Yet stock
prices are attractive here given earnings levels, corporate insiders are buying
and managers, on the whole, are signaling that earnings look to be
unimpaired. We’ll soon find out as the
third quarter’s earning releases begin to roll out in the next couple of days.
We went into the
summer raising our aggregate cash levels to roughly 55% of portfolio
assets. This buffered us from the
beginning of the recent correction.
Then, in July and August we reduced cash levels to roughly 15%. We thought we had seen the worst after the
drop that ensued S&P’s downgrade of US Treasury debt. We are holding overweight positions in US
markets in large and small capitalization stocks with exposures in Asian and
Latin American emerging markets.
Technology is our favored sector with positions in energy, copper,
agricultural and industrial sectors as well.
Our portfolio clients
ended the month of September down 12.05%.
Here are some
comparative numbers for you to review:
For
disclosure purposes, past performance is not necessarily indicative of future
results and ELF Capital Management LLC (ELF), formerly Hoffman White &
Kaelber Financial Services LLC, cannot guarantee the success of its services. There is a chance that investments managed by
ELF may lose a substantial amount of their initial value.
ELF is an
independent discretionary investment management firm established in February
2003. ELF manages a strategic allocation
of primarily exchange-traded index funds (ETFs), and may invest in other
carefully selected securities. ELF may
also employ hedging techniques, through the use of short positions and
options. ELF manages individual
portfolio accounts for both individual and business clients.
The ELF ETF
Strategy returns presented herein represents a composite of actual results from
all client portfolios managed by ELF.
Currently, it is the only composite presented by ELF and separate client
account portfolio positions are substantially similar, except as may be
modified for retirement plan accounts and accounts with net equity of $60,000
or less. There is no minimum account
size for inclusion into ELF’s ETF Strategy composite and accounts with net equity
of $60,000 or less have a tendency to downwardly skew the combined results.
ELF’s
performance data presented herein includes the reinvestment of dividends and
capital gains; as well, ELF’s ETF Strategy composite returns are presented
after deducting actual management fees, transaction costs or other expenses, if
any. ELF charges an annual investment
management fee as follows: 1.25% on the first $250,000; 1.00% on the next
$750,000; 0.95% on the next $4,000,000; and, 0.75% thereafter.
Broad market
index information provided is solely for the purpose of comparison. This index data was obtained from third party
sources believed reliable; however, ELF does not guaranty its accuracy. An investment account managed by ELF should
not be construed as an investment in an index or in a program that seeks to
replicate any index. In most cases,
investors choose a market “index” having comparable characteristics to their
portfolio as a benchmark. An ETF is a
security that tracks an index benchmark or components thereof. As ELF actively manages a strategic
allocation of primarily ETFs, selecting a comparable benchmark poses
significant challenges. Over time, the
broad market indices provided above may exhibit more, similar or less
variability of returns and risk than ELF’s strategic allocation. As well, the broad market index information
provided above reflects gross returns and have not been reduced by any
estimated fees or expenses that a person might incur in trying to replicate an
index.