DO LOST PEOPLE REALLY GO ROUND IN CIRCLES?
People really do walk in circles without a relatively fixed reference point at least as far away as the intended destination.
We believe investors can implement this lesson into their process to improve their chances of success.
“You’ve got to be careful if you don’t know where you’re going, ‘cause you might not get there.”
Yogi Berra
In 2007, Jan Souman created an experiment to find out whether lost people really walked in circles. In a word, the answer is yes. But there is some nuance. Three scenarios were tested.
Blindfold test – Souman found that blindfolded walkers really did walk in circles which were sometimes as small as 20 meters in diameter.
No blindfold but no reference point – Subjects that walked in the dark when the clouds covered the moon and stars didn’t fare much better.
No blindfold with reference point - People that had the sun, moon or stars as a reference point were able to walk fairly straight.
Think about this for a moment. Without a relatively fixed reference point far off in the distance such as the moon or sun, we are remarkably incapable of moving in the same direction for any meaningful length of time. Some of these contestants were in a dense forest. Even with cloud coverage they could have picked trees ahead for reference points but as you switch from one tree as reference to the next and the next you start to veer and eventually walk in circles similar to someone that is blindfolded.
A Tale of Two Investors
As investors, we create theoretical reference points. If one buys a stock or mutual fund because you are convinced it will do well in the next month or quarter, a pattern is created where they have to continually recycle reference points. What if the investment doesn’t perform as expected by the end of that period? There is no logical conclusion for this investor other than to sell and find something else. In this way, many investors continually trade themselves in circles and unfortunately end up near where they started.
Alternatively, were an investor to pick a reference point far into the future it would be easier to stay the course and achieve their goals. Our process at Aurora relies on fundamental research to uncover an estimate of long-term value for the security being considered. In practice, market prices fluctuate far more than the underlying value of an investment due to volatile investor sentiment. By focusing on that long-term reference point of value, we can take advantage of those variations. Should the security fall in price over the short term, we would have the opportunity to just buy more of it assuming the long-term reference point of value hasn’t changed.
Further Reading (Referenced Article)
https://www.nationalgeographic.com/science/article/do-lost-people-really-go-round-in-circles
In Summary
Early human navigators used celestial objects such as the stars for a reason. It was the only reliable way to travel without going in circles. We believe this is a universal truth that should be applied to investing. That’s why we choose to have a long-term time horizon on our investments using reference points that optimize our chances for success.
This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research and be sure to do your own due diligence. For questions regarding our individual stock strategies, please reach out to us!
Invest Curiously,
Austin Crites, CFA
Austin Crites is the Chief Investment Officer of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.