There is a theory in marketing that you don’t sell someone a drill, you sell them the quarter inch hole in a wall.1 Taken further: you don’t sell them the hole in the wall, you sell them a picture hanging on the wall. Even still you don’t sell them the picture, you sell them the beautifully decorated home.
When pushed to their conclusion, these chains always end at some deep emotional need. You don’t sell someone a beautiful home, you sell the family memories made in the home, displayed in the picture. This concept of marketing and advertising is how you end up with commercials of two people in a bath tub at the top of a cliff when the product has nothing to do with any of those things.
All good marketing sells past the actual product to some deep rooted desire or need. And while at times this seems ridiculous, it works, and there is more than a little bit of truth to it.
Anybody who watched the TV show Mad Men is familiar with this concept. They didn’t sell the product, they sold happiness.
Money is the Start of This Chain
It’s rarely ever discussed that money starts this chain. It’s the thing marketers want you to trade away. And we are constantly giving it away.
You want money because you want a new car.
You want money because you want a new house.
You want money because you want to go on a vacation.
You want money because you want to pay for a wedding.
Nobody wants money for money’s sake. Everyone wants money because it gets you something else. Money itself has no value. At all.
It’s just an imaginary concept. Really, it’s just a bunch of numbers on a sheet of paper. Or in a computer. But it’s not real. The drill is real. The hole is real. The picture is real. The emotions are real. But money isn’t.
Money’s Value
Money’s value comes from what it can be traded for, not what it is. So how does this apply to investing?
Well what is the value of a stock? Is it the present value of all future cash flows? Future cash flows are still just money. They are just money through time. And as we’ve said money is useless by itself. It’s not what you or I want.
I want to send my little girls to college someday. And if the money in the future lets me do that, then it’s valuable to me because I can trade it for something valuable: an education. So when I trade money for an S&P index fund in their 529 plan I’m doing it for the expectation of future education.
But I’m also buying the feeling of being a good parent. The feeling that I’m taking care of my family. It’s difficult to separate the two.
An investment is still something you have to purchase, and people don’t buy anything for the immediate product. We buy something because it brings us closer to meeting a deep emotional need or desire.2
Do Investments Provide More Than Returns?
Many investments portray this concept perfectly.
Do investors buy Tesla stock for future cash flows? Somewhat. Do they also buy it because it means they are innovative, trend setting, bold, contrarian, and they agree with Tesla’s vision of the future? Absolutely.
Tesla cars are expensive. Can’t buy a Tesla car? Well you can be part of the mission by purchasing the stock.3
ESG is another example. Do people buy ESG funds because they expect higher returns on their money? Somewhat. Do they also do it because it means they are socially conscious, aware, compassionate, and forward thinking? Absolutely.
Taken a step further, there are now “activist” ETFs where the ETF’s goal is to own a large enough part of the company to command board seats and change the underlying practices of the company towards thier own goals. This isn’t activist investing to make more money, it’s activist investing for a greater purpose.
Did WSB and their followers buy Gamestop stock because of the returns, or because they wanted to make a statement? A couple hundred dollars to be part of a collective mission expressing your views and commanding the attention of the world. Seems like a deal.
And finally Bitcoin. Bitcoin’s most valuable quality is it’s original whitepaper, born out of the financial collapse of 2008. Bitcoin isn’t a currency, it isn’t a store of value, it is a mission, a greater purpose. It is a gigantic Fuck You statement to the monetary system that bailed out banks in 2008 but didn’t bail out everyone else.4 That’s why it creates so much passion in its proponents.
Nobody argues about thier municipal bond on social media. But they do argue about about their mission, their passions, and their beliefs all the time.
Do you truly believe in the mission and purpose of Tesla, ESG, VOTE, WSB and Bitcoin if you don’t own these investments? Can you still believe in the mission if you sell them?
What is a Rational Investment?
For many, the answer is no. And let me be clear, there’s nothing wrong with this.5 These may not necessarily be pristine long term investments in the traditional financial sense6. A financial return is great, but it’s secondary to the deeper emotional fulfillment being purchased.
Some would say this isn’t rational. The investment is an inferior investment. It’s a bubble. You shouldn’t own it.
And yet, nobody wants money. Nobody. We all want what money will provide later. So when you say that an investment is worth X because of the money it will provide in the future, you’re only addressing part of the equation.
Look at the paths. Money is far, far away from the end goals we all seek. If an investment jumps some steps in the chain and provides the end goal right away–right now–why not take that shortcut? We’re not really going to want the money in the future anyway.
Are the rational people those who evaluate the worth of something based only on its future cash flows? Or–if we don’t truly want money in the first place–are they the irrational ones?
Nobody Wants Money
When you hear a financial analyst bemoan that an asset has become a bubble or its price is irrational, think about the marketing chain. From a financial perspective the analyst may be right. But from another perspective, a perspective closer to our true needs and wants in life, there probably isn’t a bubble. Instead, it’s marketing fulfilling our deepest desires with products that many don’t believe should serve that purpose.7
Now on a grand scale, this can be dangerous. It’s not heathy for any single product to to define who we are as a person, and it’s not a good idea for a single investment product to define our portfolio. Everything in moderation.
However, it’s always a good idea to remember from time to time why we invest in the first place.
We invest to provide for our families.
We invest for a secure future.
We invest to build a better life for ourselves.
We invest to belong to something bigger than ourselves.
We invest to express our values.
We invest to give back to the world.
But we don’t invest for money. Never forget that.
Footnotes
1-Link to original reference
2-Another example with gold. Some people say gold has no intrinsic value. It doesn’t have any cashflows. Its industrial uses are very small. Where does it get its value from? It should be close to worthless. But gold is beautiful, and it’s essentially the perfect material for jewelry. It also doesn’t degrade through time. It is timeless beauty. However people don’t really want timelessly beautiful jewelry either. The marketing chain doesn’t end at jewelry. Think of any jewelry commercial and we can all figure out what primal need jewelry aims to fill. You could argue there is nothing more valuable in the world.
3-Here’s another good example from my friend Kris. You should follow his newsletter if you don’t already:
4-I may be a bit skeptical of bitcoin’s future, but I’m fully on board with its founding mission.
5-Full disclosure I’ve owned two of these and full expect to own at least one more at some point in the future. So this post comes from a place of introspection as well.
6-Or maybe they will. Nobody knows the future and some have done pretty well over the shorter term.
7-I’ve spent most of my life with a deep dislike of marketing. I hate the way it manipulates people. But after listening to enough Rory Sutherland videos I’ve come around to the truth that marketing does provide real actual value to a product. My 23 year old engineer self can’t believe I just wrote that sentence.
well said.
with negative real interest rates, we are sure that by safe investments we won’t be able to fulfill our objectives in the future, be they education, retirement, health expenditures, etc.
this pushes people either to spend the money now, or invest in “lottery tickets”. I am really curious how this will play out in the years ahead. any thoughts?
I expect the negative real interest rates thing to be short term. Either rates will rise or inflation will come back down or both. But yeah, there are many reasons to think bonds wont’ provide much return, and stocks won’t either for the next 5 to 10 years.
I don’t think things like education and healthcare can move too far from a typical customer though. If there aren’t enough people capable of purchasing those services, the prices won’t rise.
Quick question regarding the model portfolio performance, why don’t you include another line with the historical performance of the portfolio when using leverage as it appears in the top of the page?. Thanks
Partially because I didn’t start posting it until later, and partially because I’m not trying to encourage anyone to use leverage.