Buffett and the Marshmallow Theory

For us, the best way to explain what we are trying to achieve is a mixture of a famous quote by Warren Buffett and The Marshmallow Test experiment.

Let me explain.

When Warren Buffett was asked why people don’t simply follow his approach to investing, his reply was ‘no one wants to get rich slowly’. If we’re honest most of us want instant gratification. We would rather win one large amount than several smaller amounts. Patience is a virtue.

With Buffett, he sees the bigger picture. He understands long term growth over short term gain. Compounded, his approach reaps larger and more sustainable returns over one off big wins.

Secondly, many will recognise the Marshmallow experiment as one designed to test a child’s ability to delay gratification. The child is given the option of waiting a bit to get their favourite treat, or if not waiting for it, receiving a less-desired treat. The minutes or seconds that a child waits measures their ability to delay gratification.

So how does this relate to us as traders?

Everyone initially wants to win big, we just know the big wins come infrequently. The target is always generating the highest return. So, wait, like Buffett or accept a smaller immediate prize?

We as traders with full time jobs have money to participate. Our incomes allow us to dabble in the stock market but also limits the time we can spend to research and analyse the market. This can prevent us from being profitable in the market or at least sustaining a profitable strategy. It can be a double-edged sword. I think this is the main reason why we want these quick, big wins. This drives us to be more impulsive and sometimes risk more than we need to. We sometimes struggle to manage emotion.

We see this as an opportunity. As trading isn’t our only source of income it allows us to be a bit more patient, a Buffett type of patient. We don’t mind small wins, if they’re frequent.

So, the two things which define our approach here are time and patience. We don’t have a lot of time but we are able to be patient. We’re not in a rush searching for the big wins which aren’t sustainable.

A lot of traders look for that random penny stock to rocket or take a punt on a crypto tip from a questionable forum.

We wanted to use data to find an edge, automate it to surface a higher number of trading opportunities with a good win ratio. More chances to trade means less emphasis on an ‘all in’ mentality. Our risk is lower, we can win small but frequently. This compounded gives us a sustainable approach to trading.