The Most Overused Analogies in Finance

I love using analogies to explain complex ideas. It’s a great way to make boring or difficult topics more relatable and easily understood.

But when you read as much financial information as I do you start to see some repetition in the analogies used to describe the markets and financial planning.

I’m not saying most of them aren’t helpful.  In fact, I’ve used many of these analogies myself in the past.

It’s just that I’ve read so many of them on multiple occasions that I thought it would be a good idea to put them all in one place.

Enjoy.

Sports and Games:
The baseball game analogy. We think we’re only in the 5th inning of this _________(economic cycle, bull market, bear market, etc.)

The stock market is like a casino.

Buying stocks is like a crapshoot.

It’s a marathon not a sprint.

Be content to hit singles and doubles instead of going for the home run and striking out.

Investing/trading/business is like poker. Table selection is important and if you can’t find the sucker at the poker table it’s probably you.

Skate to where the puck is going to be, not where it has been.

Investing is like blackjack. It’s not the outcomes that matter, it’s the process (Trust me, you don’t want to get the stink eye from the chain smoker at the end of the table if you don’t know the simple rules of when to hit and stay in blackjack).

Investing is just like chess.

Stock Losses:
The stock market takes the stairs up but the elevator down.

When the stock market rises it’s like blowing up a balloon and when it falls it’s like letting all of the air out.

Stock market volatility is like taking an escalator up while playing with a yo-yo.

A bear market is like shouting fire in a crowded theater.

Liquidity is like oxygen.  You don’t notice that you need it until it’s not there.

Long-Term Financial Planning:
Managing your personal finances is like losing weight. You need to exercise and eat right to lose weight just like you need to spend less than you earn and pay yourself first to manage your money.

Financial planning is like being an airline pilot. You need a flight plan, must know where you’re going, check all of your gauges and make corrections when you run into turbulence.

Think of a financial plan like the tale of the Tortoise and the Hare. Slow and steady wins the race.

Or it’s like the fable of the Ant and the Grasshopper. Plan ahead by storing up food (saving) in the winter like the ant and don’t become lazy and overconfident like the grasshopper.

Having no financial plan or insurance is like skydiving without a parachute.

Investing:
Don’t put all of your eggs in one basket.

Choosing your investment style is like picking a spouse.

Good investing should be like watching the paint dry or watching the grass grow.

Bonds are the anchor of your portfolio.

The number of combinations for your investment options to put together a portfolio is like the number of outfit combinations in your closet.

Think of bonds prices and interest rates like a teeter-totter. As one goes up the other goes down.

Investing styles are like candy. Active managers try to pick the best color Skittles (obviously red and purple) while index investors buy the whole bag.

Miscellaneous:
Use the George Costanza approach to make your investment decisions. If every instinct you have is wrong then the opposite would have to be right. “My name is George. I’m unemployed and I live with my parents.”

The Fed taking on more debt is like giving a drunk another drink.

________(anything unpredictable) is like a box of chocolates (Forest Gump movie lines still going strong 20 years later).

Goldman Sachs is like a vampire squid wrapped around the face of humanity (From Matt Taibbi…I’m fact checking this one).

Something, something 10,000 hour rule and Malcolm Gladwell.

Something, something Moneyball and Michael Lewis.

Any other good ones I missed?

Now for the best stuff I’ve been reading in the past week:

  • How exercising makes you happier (Fast Company)
  • How large fees can kill a 401(k) plan (Bason Asset Management)
  • How the negativity bias affects your decisions (Prag Cap)
  • Josh Brown on how emotions & past performance determine investment choices, not the best values (Reformed Broker)
  • Why you need an investing partner (Clear Eyes Investing)
  • The easy solution for how to invest during a potential stock crash (Business Insider)
  • The stock market is an expensive place to find out who you are (Jason Zweig)
  • Was it a stock pickers market in 2013?  Not so much says Larry Swedroe (ETF.com)
  • The business of the herd mentality (Research Puzzle)
  • Turney Duff is awesome (The Buy Side Blog)
  • Barry Ritholtz on how noise in the daily market movements can lead you astray (Big Picture)
  • 11 personal finance books everyone should read before turning 30 (Business Insider)
  • Putting the ‘market meltdown’ in perspective (WSJ)

 

 

 
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  1. JC @ Passive-Income-Pursuit commented on Feb 14

    The stock market takes the stairs up but the elevator down.

    Somehow I’d never heard that one before but it’s the truth.

    If you watch/read a lot of financial news you’re bound to here several of these each day. While they’re overused they are great because they really do simplify the complex world of investing and make it so much easier to understand.

    • Ben commented on Feb 14

      Agreed. I think these analogies are important especially for individual investors that don’t have much of a background in the financial markets.