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Are you one of those persons tempted to play the lotto, even as you very well “know” the odds of winning are incredibly small? Hey, you never know so you play, right! C’mon, I know you better than saying “no” to me. What do we find so tempting about playing the Lotto? Is it the odds of winning big against a small possible loss or the desire to take care of our material wish list once and for all and retire? Unfortunately, our wish list always seems to grow as fast as we are able to slice items off it. Furthermore, as our fortunes rise, more expensive items tend to appear on the list, making the quest almost impossible to fulfill. It seems that only at the latter part of our lives, we start to understand the valuable lessons of immaterial over material; that less is more and our overall happiness has little to do with winning the lotto.
You see, our state of happiness and valuations in the stock market trend in the same direction over time. Both have a tendency to reverse to a mean or a relatively stable level. It is well known that lottery winners are not significantly happier after a given period of time, than a control-group of participants that did not win anything. Likewise, it is well known that outsized outperformance in the stock market is not sustainable for most of us and after a given period of time will trend back to a mean. Do you travel to buy your lotto ticket at a winning location… or don’t you? Do you often buy the latest best performing funds… or don’t you? We should really leave the lotto and the latest best performing funds for what they are. Give closer attention to the small numbers around you. It is worth it. They add up and continuous moderate gains tend to make us more content and happier; a bonus that keeps on giving.
You have heard of Starbucks, right? This is one of the companies we like. They are all about small numbers adding up in a big way and we love them for it. Imagine you formed a hard-to-break habit to get your cup of coffee at Starbucks and did this almost every day of the week. Your frequent visits to get your kick would easily add up to more than $2,000 per year. According to Starbucks annual report 2013 this adds up to 3 billion visits in their stores worldwide resulting in roughly $2.5 billion in operating income. Wow! To think it all started at a single coffee shop in Seattle. If you had drunk water instead of Starbucks’ coffee, invested $2,000 per year for 25 years and compounded it at 9%, the average performance of the S&P, you would have had $170,000 in your pocket. So much for small numbers not adding up to anything.
Now, take a sip of your coffee or “doppio espresso macchiato” and think about your small numbers. They count and you should be proud of the small gains you make. Small gains give more fun; give longer lasting happiness and compounded small numbers will give you something big.
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