Tag - smart investing

The man who bought a $30,000 couch

The man who bought a $30,000 couch

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management


1. : personal inclination: wish

2 : an intense longing: craving

We live in a consumer society, and lust is a powerful motivator.

There is something very virtuous about saying no to something you want NOW and putting off your desire to have it.

The Stanford marshmallow experiment provided interesting insight into the merits of delayed gratification. The marshmallow experiment was a series of studies on delayed gratification in the late 1960s and early 1970s led by psychologist Walter Mischel. Mischel and his team placed a number of children alone in a room at a table with a marshmallow in front of them. They were instructed if they did not eat the marshmallow, but could wait until the tester returned, they could get two marshmallows.

The agonizing period of time was about fifteen minutes. About one third of the children could delay the satisfaction with hilarious tactics to witness: talking to themselves, sitting on their hands, singing, etc.

The remaining two thirds simply could not withstand the temptation and plunged into the sweet and chewy lone marshmallow.

The fascinating piece of this study came years later when scientists followed up years later to see what had happened to these children. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.

I often mention this study when talking to younger people and their money. The things you can do now to set aside funds can have so much greater influence on your options and net worth than if you were to upgrade to a fancier car, better apartment, or newer IPhone.

One example I remember from a friend of mine, when I was working at an investment bank in the early 90’s. Like many companies, our firm would give options or shares for being dutiful employees.

My friend and his wife wanted so badly to buy a $1,000 couch to match their apartment’s drapery and painted walls. With very little available cash, he sold off some of their available company shares he had accumulated. It was only about 18 months later that the stock of our company rose by a factor of 30.

Long after they moved from that small apartment, he refused to sell or trash this now faded and threadbare loveseat. He would, in a humble manner, lead guests down to the basement’s TV room and ask them if they would care to sit on a $30,000 couch.

This is not say one should live like a monk. But, if you sense you may be that child who would dive into the single marshmallow to have immediate satisfaction, keep this in mind when you find yourself rationalizing your next purchase.

And consider investing that same amount instead.