Why Long Term Goal Planning Might Be Severely Hurting Your Financial Future
76 years ago Napolean Hill wrote the book “Think and Grow Rich,” one of the best selling self-help books of all time. He argues that to reach financial wealth the most important thing to do is create an aggressive and specific target monetary target. Tape the goal to your bathroom mirror, imagine yourself achieving that goal, and make it part of your being. Once you know where you’re going, getting there is the easy part.
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This idea of long term goals has become a cornerstone of personal and business development. Esteemed business authors and experts have written extensively about this concept. Here are a few better known examples:
- A 1981 article by George T. Doran first described the value of setting Specific, Measurable, Attainable, Relevant, Time-Bound (SMART) goals.
- The 1991 book “Built to Last” by Jim Collins spent an entire chapter explaining how successful companies have Big Hairy Audacious Goals (BHAGs). Hard to achieve goals that galvanize and align everyone you interact with.
- The 2006 book “The Secret” borrows wholesale this idea of immersing yourself in your goals. If you fall in love with the idea of having a bunch of money, you turn yourself into a riches magnet.
At some level this approach makes intuitive sense. After all, you wouldn’t set sail without a destination in mind.
There’s one problem: it doesn’t always work
You Sure Know How to Pick ’em
I’ve analyzed 100 great business executives and have found 99% of them share one trait which I feel is the main driver of their success. The person who doesn’t do this thing is nothing more than a statistical outlier.
What’s the one trait?
They all wear underwear. (One of the CEO’s was more…liberal…than the others).
It’s a ridiculous argument, right?
Folks with a mathematical bent will recognize this is a classic example of “selection bias.” When you focus on one group and ignore the excluded groups, you’re susceptible to focusing on traits which don’t distinguish that group.
My analysis never happened (no, I don’t make a habit of asking CEO’s if they wear underwear). But if it had, the fundamental flaw would have been I didn’t talk to the people who weren’t successful. If I had, I’d know most people wear underwear, successful or not.
As humans, we love to sweep failures under the rug and focus on the rags to riches stories. Quick, try and name the CEO’s of 10 now bankrupt companies.
If you manage it, you’ve a better memory than I.
It turns out, not many journalists are champing at the bit to interview stewards of failed companies.
In the introduction to “Think and Grow Rich,” Napolean Hill goes to great lengths to tell us how many successful people he interviewed. He even provides a list of interviewees which is a veritable who’s who of success stories at the time. Where were the ones who failed? Classic selection bias.
His thinking goes like this: “Of the 500 people I’ve interview, most of them set an ambitious goal and then devoted their life to attaining it.”
The thing is, the people who fail do the exact same thing.
Everyone who has failed spectacularly knew exactly what they were trying to accomplish and you better believe they worked their tails off. Nick Leeson, the designers of the Titanic, the manufacturers of the Hindenberg, and programmers for Google+ all worked incredibly hard to accomplish something they thought would be amazing.
The difference is the people in charge of the successful ventures were right and the failures were wrong.
Jim Collin’s introduced the concept of Big Hair Audacious Goals (BHAGs), and claims it’s one way great companies distinguish themselves. Here is a list of a few he highlights:
- Disney – Best the best company in all fields of family entertainment
- Ford – Democratize the automobile
- Stanford – Become the Harvard of the West
How about these?
- Become the global leader in rentable home entertainment
- Tear down barriers, lower costs, and increase the opportunities for home ownership
- Become the most profitable, single-source provider of communications services to customers around the world
They are the mission statements for Blockbuster, Fannie Mae, and WorldCom. The reason I could find these is because their failure was so spectacular. What about all of those companies that never make it, or sort of fizzle away?
I can’t name one company without a mission statement/long term plan. However, 71% of companies fail within the first 10 years (a decade is the minimum for BHAGs according to Jim Collins).
Maybe long term goals aren’t all they’re hyped up to be…
…or maybe they’re bad
The benefits of long term goals are oft discussed, not so much the disadvantages. Well…with the exception of an article published by the Harvard Business School with the amazing title of: “Goals Gone Wild.”
Let’s shine a light into the long term goal pitfalls.
Locking it In
I recently ran across a fellow investors explicit, and aggressively public, goal of buying 100 rental properties by 2023. Let’s take a moment to chat about that.
This investor has been investing for three years and has had great returns investing in rental properties. However, that three year period has seen abnormally high rent/home price ratios.
His goal assumes that nothing will change in the next decade.
There is little I can say with certainty, but let’s just say I have a high degree of certainty this is not a valid assumption.
The problem is that in creating too specific of a goal, this investor is locking himself into one course of action. If he follows Napolean Hill’s advice, he will immerse himself in this goal and make it an all consuming passion.
What if the market he’s investing in has a surge in home prices? What if they drop precipitously in his area? What if interest rates return to the 1980’s level of 15%?
Will he be able to change his approach? Potentially. But that will require him casting aside the image of himself he will have crafted over many years. That’s not easy.
A typical person in that situation might just keep working towards the goal. 100 rental properties or bust!
I suspect this investor’s real aim is financial independence.
By setting this an overly specific goal he’s making it hard to be dynamic and I feel there’s a strong chance it will make it harder to reach his true desire.
Events outside of your control have a tendency to throw your plans into disarray. Having incredibly specific goals which become your primary focus can hinder your vision and make it harder for you to adapt to situations as they unfold.
Unless of course you first suffer from…
Most business experts argue that a long term goal should be at least 10 years.
Malcolm Gladwell, in his popular book “Outliers,” argues that to become world class at anything you need to practice it for 10,000 hours.
That number has no meaning to me, so let’s break it down to something I can digest. There are 40 hours in an average work week and 50 work weeks in a year. Thus 10,000 hours is the equivalent of 5 years of full time work (less if you put include overtime).
If we follow that logic, while you’re working on a 10 year plan, you’ll spend the first 5 years mastering the subject and the second 5 years doing…the same thing over and over again.
I, for one, can’t survive without a challenge. Mihaly Csikszentmihalyi famously argues people are happiest when we are absorbed in a task at the edge of our current ability, an idea he calls “Flow.”
If I “mastered” a subject years ago, how excited am I going to be to wake up ever morning and keep doing the same thing?
Unless you’re a dedicated Japanese sushi maker, I think most of us will need to seek out new and regular challenges.
Now I recognize that long term goals can have many phases and in a company of 100 people this comparison breaks down, but the risk of goal fatigue is still large.
Serious Unintended Consequences
In a great, albeit dry, paper by Bargh, Green, and Fitzsimons titled “The Selfish Goal: Unintended Consequences of Intended Goal Pursuits” argues that once we set a goal, it consciously and subconsciously influences our decision making, in surprising ways.
Let’s say you are interviewing candidates for a position. The first thing most people do is create a list of criteria on which to asses the interviewees. Makes sense.
What doesn’t make sense is during the weeks or months of your employee search, you will subconsciously apply the same metric to everyone you meet.
Let’s say you’re in the process of interviewing computer scientists. If you go to a party after work hours and meet an art student, you are statistically more likely to dislike them than if you weren’t looking for a programmer.
Does That Frighten Anyone Else?
It’s easiest to see the effect with money. Let’s say your long term is to make 10 million bucks in a next 10 years. For the entire 10 years you will automatically place a negative bias on any idea that doesn’t fit into your “make lots of money” goal. Even if it’s something reasonable like “don’t crap on your shareholders.”
This idea helps explain the frequency of financial scandals in the monetarily driven country of America.
From this point of view, the thinking in books like “Think and Grow Rich” and “The Secret” is not only not realistic (and statistically flawed), it can be downright dangerous.
The same applies to non monetary goals. You can get so caught up in what you’re attempting to accomplish that you ignore the negative consequences of your actions.
Wrap It Up: What Should We Do About Long Term Goals?
Long term goals can be useful…if you’re right.
If you set a goal that is wrong, too limiting, or has surprising consequences it can be devastating.
How do you set the correct goal? If you don’t have a functioning crystal ball, keep them generic and open for interpretation.
Abandon Big Hairy Audacious Goals
As we briefly mentioned, in the book “Built to Last,” Jim Collins came up with what he calls Big Hairy Audacious Goals (BHAGS). The theory being that by setting a very aggressive time-bounded goal it will provide invaluable focus and clarity at at any level (individual, team, or company).
That was in 1994.
Credit to Jim Collins because following the success of his book he cobbled together a research team and did a 5 year in depth comparison of good and great companies. Because he didn’t just look at amazing companies (like Napolean Hill), he was able to avoid much of the selection bias we discussed earlier.
When the data was in, he quietly did something astounding…he changed his mind.
In his 2001 book “Good to Great” there is nothing about goal setting at all. In its place is what he coins the flywheeel. A company needs to continually try different strategies and run with the the good ones and cut short the bad. Build inertia over time, like a flywheel. In many ways, this is the opposite of setting one goal for 10 years down the line and doggedly pursuing it.
There are no shortage of examples of companies which started in one arena and switched to another because they felt the opportunity was greater. Nintendo originally sold playing cards. 3M was a mining company. Where would they be if they had started with a 10 year plan?
Instead, focus on short term goals. Personally, I think three to six months is about right, but I’ve no data to support that.
Make these goals SMART, develop a detailed plan, and then put your full effort into accomplishing said plan.
Some of these goals you’ll achieve, some you’ll abandon. Either way, set a new goal.
However, before setting your next goal take a step back and ask if you should continue down this path. Has the market changed? Do you still enjoy what you’re doing? Is this affecting another aspect of your life (or a loved one’s life) in a way you had not forseen?
This isn’t easy. You have to be honest with yourself and attempt to not get caught up in any inertia you have created.
By all means, have a vague idea of where you’re going. However, go to great lengths to keep it generic. Don’t make it a SMART. goal. Design it so you can easily change direction and not have to strip away part of your identity.
Our current approximate destination is: grow a cash flow focused real estate company until it’s large enough that we can IPO, without sacrificing returns.
Short term goals are a different story…
Photo Credit: fleno.de