Analyst Insights: Investing with Atomic Habits
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“Your outcomes are a lagging measure of your habits. Your net worth is a lagging measure of your financial habits. Your weight is a lagging measure of your eating habits. Your knowledge is a lagging measure of your learning habits. Your clutter is a lagging measure of your cleaning habits. You get what you repeat.”
James Clear’s 2018 book, ‘Atomic Habits’, was a New York Times bestseller and has sold over 5 million copies worldwide. In it, Clear starts with a pretty wild premise that big goals should not be the main focus of our lives. That struck me as basically the opposite of what I’ve ever been told. I’ve read quite a bit over the years on success and productivity, and goal setting is usually at the forefront.
Of course, there are many different tactics for goal setting. One that always sticks out in my mind is SMART goals — a mnemonic acronym that sets out criteria for setting effective goals and objectives.
SMART goals are Specific, Measurable, Achievable, Relevant, and Time Bound, in case anyone’s interested.
Clear argues that focusing on goals can distract us from the most important elements of achieving them. I know this from my own experience with resolutions — often I try to do too much too fast. I lay out five major goals I want to achieve all at once and focus intensely on them for a few weeks. Then I burn out, not seeing immediate results and the whole thing collapses. I’ve seen this many times with novice investors as well. They launch into investing with a large amount of starting capital, expecting to see instant results. As soon as something goes wrong, they retreat immediately, usually losing money in the process. If they ever return to investing, it will be very cautiously, typically after a major run in the market.
“People make a few small changes, fail to see a tangible result, and decide to stop. You think, “I’ve been running every day for a month, so why can’t I see any change in my body?” Once this kind of thinking takes over, it’s easy to let good habits fall by the wayside. But in order to make a meaningful difference, habits need to persist long enough to break through this plateau—what I call the Plateau of Latent Potential.
The goal in any sport is to finish with the best score, but it would be ridiculous to spend the whole game staring at the scoreboard. The only way to actually win is to get better each day. In the words of three-time Super Bowl winner Bill Walsh, “The score takes care of itself.” The same is true for other areas of life. If you want better results, then forget about setting goals. Focus on your system instead.”
Instead of thinking about goals, Clear believes success is achieved through tiny (atomic) changes that we do repeatedly, as these can form habits that last a lifetime.
“The more you repeat a behavior, the more you reinforce the identity associated with that behavior. In fact, the word identity was originally derived from the Latin words essentitas, which means being, and identidem, which means repeatedly. Your identity is literally your ‘repeated beingness’.”
If you’re reading this, I’m assuming you think of yourself as, or want to be, an investor. However, just buying a stock doesn’t make you an investor, no more than reading one book makes you a reader. I believe being an investor is a lifetime pursuit that involves several small habits being repeated over and over again.
Spend less than they earn
Plan for their future
Are curious about the world
Are information junkies
Think long term
Stick to their plans
Don’t let their emotions control them
These aren’t habits that one can develop overnight. It takes small actions taken on a regular basis to change behaviors over time.
Here’s a quick breakdown of Clear’s ‘Four Laws of Behavior Change’ and how we could think about them through an investing context.
Make it Obvious
This itself seems obvious, but many habits fail to form because we are not clear about what we are going to do. Remember, this is something that we are expecting to repeat so many times that it becomes automatic — part of our identity. Saying we are going to get into the habit of “saving more” is not clear and obvious. It creates friction between the intent and the action.
“Broadly speaking, the format for creating an implementation intention is: ‘When situation X arises, I will perform response Y’.”
How would we go about creating a habit using the above advice?
“When I get paid, I will put 10% of that into a savings account”.
What could be more obvious than that? It’s clear, concise, and easily actionable.
If you want to avoid acting on emotion when stocks are in turmoil, borrow this habit: “When I’m thinking about selling a stock, I will write down what I’m feeling and wait three days before acting”.
Make it Attractive
It’s easy to avoid creating new habits because we see them as somehow changing the way we live for the worse. Change can scare people. Yet everyone wants to change certain things. We think fondly about the end results, yet think negatively about the path to getting those results.
But there are ways to increase your ability to form habits by simply finding the most attractive version of that habit for you. If you want to get fitter, but hate the gym, deciding to go to the gym every day might not be the best course of action. If, on the other hand, you like playing tennis, then playing tennis more regularly is probably the best option.
If you want to know more about business, it's easy to think that reading the Wall Street Journal every day might be a good option — it is by the way. But, maybe it’s not the most attractive option for you. Perhaps listening to The Journal’s daily podcast is more attractive. Perhaps listening to it on the way to get your morning coffee is even more attractive. Or maybe listening to MyWallSt’s much better podcast is the most attractive.
Make it Easy
Want to ensure that you save that 10% every month? Set up a monthly transfer to your savings account. Make it automatic — the default. Clear notes that inverting the rules can work at eliminating bad habits. Make it hard for yourself not to do.
Want to listen to more business podcasts? Set up notifications to let you know when they are released. Have them automatically download to your device so they’re always available.
Want to read more financial blogs? Find an app like Pocket that saves articles for you to read later. Go one step further and add the app to your iPhone’s dock so it’s always visible to you — James Clear actually does this.
Make it Satisfying
“Saving money is often associated with sacrifice. However, you can associate it with freedom rather than limitation if you realize one simple truth: living below your current means increases your future means. The money you save this month increases your purchasing power next month.”
This is definitely the hardest when it comes to financial matters. We’re hardwired to seek instant gratification. But real satisfaction in finance comes long after you take action. In fact, seeking instant gratification in financial matters is one of the surest ways to fail.
“Cardinal Rule of Behavior Change: What is rewarded is repeated. What is punished is avoided.”
Clear suggests that rather than fighting against this human instinct, we should try to hack it by creating immediate rewards. Obviously, the key to this is that they don’t conflict with our long-term ambitions. So don’t save $5 on coffee tomorrow morning and reward yourself with a trip to Egypt. But do try to find small ways to reward yourself. Being an investor isn’t about being miserable, even in the short-term — although it certainly can feel that way sometimes.
With that, I’ll leave you with the words of Clear himself: