Why investors should forget about delayed gratification
This article is part of our Summer reads series. Visit the full collection for book lists, guest essays and more seasonal distractions. The marshmallow test is a classic of standardised psychology.
A young child is given a marshmallow, and told they can eat it whenever they like. Wait for 15 minutes, though, and they can have two. Then they are left alone.
When the test was first performed, at Stanford University in the 1960s, the average child succumbed in three minutes. But those who did not were rewarded with more than just a sugar rush. A follow-up study in 1990 showed that success on the test was associated with a whole range of goodies in later life, from academic achievement to coping better with stress.
By now, the associated investment lesson is eye-rollingly familiar. Jam tomorrow should be prized over jam today. Valuing a firm by its present earnings, assets and dividend yield is for the dinosaurs.
The pace of technological innovation has made these metrics obsolete; instead, what matters is a company’s chance of explosive future growth. For the canonical example look to Amazon: unprofitable for decades, now the world’s fifth-largest company. To their proponents, the beating growth stocks have taken over the past year simply does not matter.
Truly innovative, disruptive firms will eventually provide returns that make any number of temporary setbacks eminently bearable. Such thinking has guided some of the most successful investors of the past few decades. Yet their strategies have played out during a 40-year period in which interest rates have mostly fallen.
Read more on livemint.com
