Returns on habits are compounding. 1% better each day can produce astonishing results in the long run.
But it goes both ways. While good habits can drastically improve our quality of life, bad habits can slowly destroy us.
So, how do you create good habits and get rid of the bad ones?
This is the idea that James Clear explores in “Atomic Habits”.
Today we’ll be diving deeper into some of the concepts shared in Atomic Habits. Next, we’ll take a look at how these could be applied to become better investors.
The three layers of behaviour change
In Atomic Habits, James Clear describes behaviour change as being like layers of an onion, where you have outcomes on the outside, processes in the middle and identity at the core. Outcomes are about what you get. Processes are about what you do. Identity is about what you believe.
Your identity shapes your habits
One of the main reason why your beliefs play such a powerful role in shaping your identity is because they help guide the actions you take and habits you form, which determines the person you become.
To build better habits, James Clear suggests to drive the actions we take based on our identity, rather than outcomes. This means focussing on who you want to become, rather than what you want to achieve.
As investors within a group investment fund, we may want to become:
- Dependable decision makers. Develop a track record of being successful investors.
- Entrepreneurs. Build successful businesses.
- Philanthropists. Make the world a better place.
- Explorers. Financially free to travel the world and experience different cultures.
After carefully inspecting your identity and seeking out what you want to become, the next step is figuring out how to get there.
Forget about goals, focus on systems
To navigate this journey, James Clear provides a dose of slightly unconventional wisdom in saying that it’s best to forget about goals and focus on systems.
James distinguishes between goals and systems by saying:
“Goals are about the results you want to achieve. Systems are about the processes that lead to those results.”
At the end of the day, this idea isn’t really anything new, we all know that goals provide direction, but they are meaningless without action.
On top of this, James Clear shares that becoming fixated upon our goals can also limit our happiness.
James Clear explains this by saying:
“The implicit assumption behind any goal is this: “Once I reach my goal, then I’ll be happy.” The problem with a goals-first mentality is that you’re continually putting happiness off until the next milestone.”
This kind of thinking has been instilled in us from a very early age; “Do your work now and then you can play” or “I’ve got to save money for travelling overseas, so I’ll try cut costs by not going out with my friends on the weekend”. Sound familiar?
There’s no doubt that putting our heads down and grinding can help to reach our personal milestones. But this doesn’t always work if we’re grinding away at the wrong thing. So how do we focus on doing meaningful work?
It is our systems that allows us to pursue continuous improvement, to try be slightly better each day. And it is the continuous improvement of these systems that allows us to focus on the right thing.
James Clear puts this simply:
“You do not rise to the level of your goals. You fall to the level of your systems.”
But… we all know how easy it is to pick something up and then put it back down shortly after, despite all of our best intentions.
The same goes for investing with mates. Life can get in the way, making it challenging for your group to catch up on a regular basis and research new investment opportunities.
When you first establish your group investment fund, everyone starts off super excited, fuelled by the vision of making a lot of money and being able to buy nice things together… But this excitement can start to dwindle when it comes to dealing with the not so fun stuff, such as writing contracts, getting legal documents approved, and sussing out taxes.
So, how do we create systems that set us up for success?
The Four Laws of Behaviour Change
In Atomic Habits, James Clear provides a solid framework for building systems to create good habits, which he refers to as the Four Laws of Behaviour Change:
- The 1st law (Cue) – make it obvious.
- The 2nd law (Craving) – make it attractive.
- The 3rd law (Response) – make it easy.
- The 4th law (Reward) – make it satisfying.
To break bad habits, we simply invert the Four Laws:
- The 1st law (Cue) – make it invisible.
- The 2nd law (Craving) – make it unattractive.
- The 3rd law (Response) – make it difficult.
- The 4th law (Reward) – make it unsatisfying.
To summarise, “the cue triggers a craving, which motivates a response, which provides a reward, which satisfies the craving and, ultimately, becomes associated with the cue.”
The 1st law – make it obvious
Let’s take a look at how these four laws of behaviour change might apply to becoming a better investor.
At the end of the day, being a successful investor is all about knowing when to buy, hold or sell – and each of these decisions relies on a cue or collection of cues.
The cue may come in the form of a news article, a quarterly financial report, an announcement from a central bank about interest rates; basically any snippet of information that may hold financial rewards for your investments.
Knowing where to find these cues helps you become a more informed investor, which can help you make better investment decisions.
Fortunately, in the digital age, gaining access to investing cues is easier than ever.
Our mobile phones give us access to an incredible selection of apps, newsletters and websites about investing that can provide us with cues in the form of push notifications. For updates on stocks we typically use Yahoo Finance or Simply Wall Street.
The 2nd law (craving) – make it attractive
Our phone buzzes, we pick it up. Next we see an alert with a headline about a company we’re interested in investing in. This triggers a craving to learn the contents of the message.
But as we all know, being distracted by phone notifications isn’t always the most productive use of our time. Constantly checking notifications about the stock market all day long is probably something you’ll want to avoid.
Instead, treat the notifications as a subtle reminder to do a little research on investing at a set time each day, maybe even just a 5 min browse while you’re having your morning coffee.
Starting a group investment fund is a great way to make investing more attractive for three key reasons:
- You can grow the value of your portfolio fast, while spreading risk
- You can draw on each others knowledge and skillsets
- You can turn investing into a social activity
Investing with friends is attractive because the value of your fund can grow very quickly when you’re all contributing on a regular basis. While you may only own a portion of that fund, it’s still pretty satisfying seeing the total value of your portfolio climb at a rapid pace.
Also, by drawing on each others knowledge and skillsets, it can be a lot easier to find investment opportunities – without having to put in all the work yourself!
On top of this, when investing on our own, we’ve only got ourselves to blame if our portfolio performs poorly. On the other hand, when investing with mates and managing each other’s money, each of you is accountable for each others success. While this means that your mates will probably give you a hard time if you’re responsible for picking investments that flop, you’ll be seen as a legend if you pick investments that make you and your mates rich.
And the best part of investing with mates… is catching up with your mates. Grab a few drinks, have some fun with it. Plan what you’ll do with the money when you eventually cash out!
The 3rd Law – Make it easy
A lot of people don’t bother investing because it’s seen as being too hard. At first glance, there’s a lot of complicated financial terms and tax requirements to learn, plus we may feel like we’re already far too busy with everything else on our plates. But it doesn’t have to be this way. We need to find ways to make investing easy.
When it comes to investing in the stock markets, there are plenty of great apps that truly make life a lot easier for us, such as Sharesies, Hatch, Tiger Trade, InvestNow, Kernel and Interactive Brokers.
However, since Sharesies and Hatch don’t allow you to sign up as a company, partnership or other group investment fund structure, we use Investnow, Kernel and Interactive Brokers for our group investment fund. You can find out more about these platforms in our article on Setting up Bank and Brokerage Accounts.
But while it’s easy to invest money randomly, we need to find ways that make it easier to make the right investments.
The way we respond to our cues and cravings as investors plays a critical role in our success – or demise. It’s far too easy to be driven by fear in our investment decisions, whether it be leaping into assets due to FOMO (fear of missing out), or rushing to sell them in a state of panic. We need to make it easy for ourselves to avoid this by sticking to an investment framework, which is essentially a criteria of things you check each and every time whenever you want to know whether to buy, sell or hold and asset.
The 4th law – make it satisfying.
And finally, in order for everyone in your investment fund to want to continue investing together, it needs to be satisfying. Sometimes this may be easier said that done, especially if the markets are crashing and your portfolio is plummeting in value. Don’t give your mates too much of a hard time if they pick the wrong company to invest in, or if it seems like they’re not pulling their weight when researching investments. At the end of the day, it’s all about taking the learnings and having fun.
Celebrate success when things are going well. Don’t worry if things don’t go as planned, use the learnings to iterate on your approach, so that you can do better the next time.