Compounding in Traffic
The Till - Vol #22- January 22nd, 2021
Whether it’s to visit family over the holidays or adventure out for a much needed break, travel almost inevitably hits some kind of traffic jam. Even when you’ve flown halfway around the world at jet speed, there are final miles where you’re stuck in gridlock.
Investing can be much of the same experience. There are easy wins, where the market seems to float endlessly higher. When bull markets soar, you can almost feel the wind rushing past your ears, as if you were on the wide open road.
Things get interesting when you hit traffic though. Drivers who lack patience will often resort to lane switching. There is some friction (transaction cost) here, both operationally in making the switch, but also in getting the timing right. How often do we switch into the faster moving lane only to see it halt?
Starting on road trips as a kid, I always found it interesting to pick a benchmark when you hit a traffic jam. What are the other cars around me doing, and is it working out?
More often than not, the aggressive lane switcher ended up back in the same place he or she started. The “slow” lane doesn’t end up moving any slower than the “fast” lane. Jockeying for position in a crowded space creates a lot of stress without much benefit.
That’s not to say there isn't an edge in doing this specific type of trading or driving well. The cabbies and daily drivers who can consistently navigate the traffic patterns, are equivalent to the liquidity providers who sit at the epicenter of flow and microstructure. Investors with different goals have a much harder time.
Investing well for the long term is about continually putting yourself in a position to achieve compounding returns. It’s knowing when your actions can and can’t make a difference. On the road trip, this is when the highway is wide open, and you have freedom to adjust your speed, while being cognisant of the risks that come with that.
If traffic is going 70 MPH (and your GPS is estimating arrival based on that), the way to “beat the market” is going faster than 70 MPH. On a 50 mile trip, averaging 75MPH gets you to your destination less than 3 minutes faster than the speed of traffic.
Averaging 5 miles per hour over the speed limit can be harder than you think, and requires plenty of time 10 MPH faster with greater risk of a ticket. Is getting there just a few minutes sooner worth the vigilance and risk required?
Perhaps the calculus changes as that road trip gets longer. If your in-laws live 500 miles away, nudging that 70 MPH average up to just 73 MPH gets the family there almost 20 minutes faster with much less time at higher speeds than if you tried for 75 MPH. A little bit of edge and a long horizon compound quickly.
Every driver and every investor is different, and has to make their own decisions about when risk is acceptable and how much to take. If you’re going to put the pedal to the metal to boost returns, you have to be willing to accept the volatility that comes with traffic stops and tickets.
Sticking to your plan, and not letting backseat drivers or engine revving competition goad you faster, is how your road trip and investments deliver on expectations. In both cases, it’s about the destination, not the journey.
Thanks for joining us,
Mark Phillips
CEO