Average Up Your Life
Many lessons learnt from investing are readily applicable to other aspects of Life. That’s because the underlying psychology driving the markets is the same when it comes to many of our Life goals and aspirations. In the markets we hope to gain a monetary profit. In Life we hope to gain happiness. It’s a high stakes game in both arenas.
Last time we saw how averaging down in Life – investing emotions and energy in deteriorating prospects hoping for a turnaround – is one of the most draining and regretful things we can do. Yet that’s what many people do.
I thought it fitting to present the other side of that coin. Once again borrowing from ideas in investing, we’ll look at what we could do instead to better the quality of our Lives by making better choices in key areas.
Today we’ll talk about the opposite of averaging down – averaging up.
What Is It?
People have a tendency to go for the bargain, preferring to buy on the cheap. Hence when the price of a stock drops, they think it’s a bargain and add more to their position. They average down, and their average cost price per share is lower.
Averaging up is just the opposite.
Say you bought ten shares of stock XYZ for $100 each. That’s a total investment of $1000.
Then XYZ rises to $110. With another $1000, you buy another 9 shares. You now own 19 shares for an average of $105. Then it rises to $120, and with another $1000 you buy 8 shares, you now have 27 shares at an average price of $111 each.
Averaging up is counterintuitive for many people. Since they are used to getting going for bargains, or waiting for prices to drop (as when you’re holding off buying that flat screen TV), it is hard to buy something as it is on the rise. The very basic goal in investing is to buy low and sell high.
So why do it?
Why Averaging Up is Better
There are many reasons to average up but here are three.
- Proven track record – A stock that has done well and shown you a profit has proven its worth. This is especially so when the general market is doing badly, but the stock price is stubbornly going higher. By buying as the price is rising, you invest more in something that is already giving you returns.
- Momentum – when a stock price rises, it tends to attract more investors. When they too want to get on the train, demand increases, and price are pushed ever higher.
- Knowing your stop loss – when you average down, you constantly lower the average cost of your shares but your losses are cumulative. At which point do you sell? You have no reference point.
When you average up however, your profits are mounting.
BUT you also have a constant reference point aware of what your stop loss should be. When the price is $110 you know that your breakeven is $105. When it’s $120 you know it’s $111 and so on. As soon as price drops below that you know to sell.
With that background, we’ll look at how these ideas work in the two example Life areas we used in our last article – relationships and work.
Many good people have a tendency to give and keep on giving. Once they are in love, or have formed a bond of friendship, they find it hard to know when to back out. So when things go bad, they try their utmost to make it ‘right’ again. They invest time, emotion, effort, and money.
Perhaps a part of it has to do with the belief that with enough love, things will turn around, the other person will finally ‘see the light’ and things will improve from then on.
That is why people will put in more when a relationship is not working. Ironically and sadly, it’s when things are doing very well that they back off on the effort. The problem with this is the danger of lapsing into the state of taking things for granted.
The application of averaging up in relationships is actually counterintuitive but very important. It means to put in more into a relationship that is actually doing well.
Why Average Up in Your Relationships
Here are very important justifications for averaging up in relationships.
- It’s worth it – A relationship that is loving, mutually giving, respectful and empowering is one of the best things you could have in Life. Therefore it’s very important to nurture it. As you do so, you remind yourself to never ever take it for granted. This is especially so when the ‘general market’ for relationships these days is rife with fickleness, materialism, unfaithfulness and sometimes, just utter laziness. A relationship that is positive for your Life is the one that you should put your effort into.
- Momentum – Why is there a well-known “honeymoon period” in relationships which precedes an accepted period of deceleration of energy, passion and interest. This happens because somehow, the upwards momentum is lost. Perhaps it is that “taking-for-granted” phenomenon at work. Perhaps it is laziness. Neither is an excuse. When you continue to value each other, and pay attention not when things are slowing, you keep the momentum. It’s a feed forward mechanism that makes two people want to continue to give, place the other in a position of importance, and ensure the relationship is safe and player-proof.
- Knowing your stop loss – when you average down in relationships, you can lose sight of how much you’ve been drained, hurt, abused. There is a numbing sense of acceptance, and few people realize they’re on an ever descending spiral of drain and depression until some tragedy occurs and they’re completely lost. When you’re used to averaging up on the other hand, any drop is immediately recognizable as a potential problem that need sto be addressed, worked out, and resolved together.
Work and Career
Many people at work are like hamsters running the wheel. No matter what happens, they feel the need to keep it spinning. They are fixed on one track and it does not occur to them to get off it.
Perhaps it’s because we were taught the importance of hard work from an early age. Perhaps we were imbued with the idea of unquestioning loyalty to authority, such as our employer. Maybe that’s why millions today keep their noses to the grindstone no matter how bad things are. They believe that with continued hard work, their efforts will be recognized one day and they’ll get that big break. Each missed promotion or salary increment only strengthens their resolve to work ever harder. They average down.
The application of averaging up in your work or business is putting in the effort only when it shows you a return. This need not be just monetary, but it must be in a form of job satisfaction that appeals to you, such as a sense of purpose, pride, learning, accomplishment, challenge, contribution, or excitement. The more job satisfaction you get, the more you should put into your work.
Why Average Up at Work or Career
Here are three reasons to think about averaging up only at work.
- You become a happier employee – While this idea seems selfish, it actually benefits the company too. When you are treated fairly, you are happier, and you love your work more. You feel motivated and you won’t be carrying resentment with you everyday to work. If the job fit isn’t right, you leave, which benefits the employer since they can find someone who would do a better job than you anyway.
- Momentum – when your job gives you great satisfaction, you put in more effort to do an even better job. This in turn benefits your employers and your customers, and they will be motivated to treat you well. A lot of people are content to tread water and do the minimum of work, but not you. When you constantly push and add value, you generate ever increasing value for yourself and your employer. This is a perpetuating virtuous cycle, a win-win situation.
- Knowing your stop loss – when you constantly evaluate if your job is giving you satisfaction, you will not end up like many people who show up for work like zombies, and then go home to repeat the cycle the next day. They have no idea what value they are generating for the company and what satisfaction they are deriving for themselves. When you make it a point to average up, you are constantly aware of what you are putting in, but also when incremental levels of effort and contributing aren’t giving returns.
Averaging up in Life – putting more effort only into things and people who are giving back, ensures you are always investing your Life in what adds value to it and makes you happy. While that means continued effort, it also means you are continually adding quality and happiness to your Life.
Yet it is counterintuitive. Many people are not used to putting effort into something going well. Indeed that’s when they might feel they are entitled to a bit of slacking off. Rather, they have been conditioned to put in bursts of effort only to tackle threats or fix things that are going wrong, such as the appearance of a third party in a relationship, or the arrival of an ambitious young colleague at work.
The fact is, many people are sprinters, not endurance runners. They can put on short bursts of effort to deal with immediate crises, but when they have accomplished something they think it’s a reward to kick back and slack off. That’s why so many clients initially ask me for a meal/exercise plan with the idea that after getting into shape, they can go back to their normal lives of eating junk food and zero activity.
But things that make up a full Life, like relationships, work, business, self-improvement, learning, require you to be in them for the long haul. You have to be an endurance runner. Without continued infusion of effort, the common problems like boredom, lack of excitement, and not feeling alive lead to all the other problems we are – sadly – only too familiar with.
So, that’s averaging up!
Next time, we’ll look at another idea from trading – cutting your losses early.