5 investing lessons from Game of Thrones
The hit fantasy series has a lot of advice that investors can use in real life, writes Ruth Saldanha.
If you’re on any form of social media, it is almost impossible to avoid references and discussions around HBO’s epic fantasy series Game of Thrones. Based on the book series A Song of Ice and Fire by George RR Martin, the eighth and final season premiered last month to a record 17.4 million viewers.
The show’s appeal stems from its character complexity, surprise plot twists and strong female characters, not to mention the fantasy world of Westeros is also filled with a lot of blood, battles, sex and violence.
What does any of this have to do with investing? Well, it’s hard to miss some investment truisms on the show – both overt and covert. One of the most obvious references to investment is the set of values held by the Iron Bank, the richest bank in the world of Game of Thrones, featured for going through great lengths to make sure its debts are repaid. The bank exemplifies the power of money and sets the standard for integrity – and influence – when it comes to investing. As Tywin Lannister, a major character in the show says of the Iron Bank, “We all live in its shadow and almost none of us know it. You can’t run from them, you can’t cheat them, you can’t sway them with excuses.”
Yikes. But there also less obviously stated investment lessons hidden in some of the most well-known quotes of the series. Here’s a look at five of them:
Winter is coming
Even those who haven’t watched the show would have heard this phrase. It refers to the inevitability of winter – a harsh and brutal reality in the world of Westeros – that lasts years, sometimes decades. If you don’t plan for winter in the warm summer months, you are doomed.
“Winter is different in Westeros. While the turn of the calendar page to November provides us with a signal to get the boots and warm coats ready, Westeros residents don't know exactly when winter will arrive. And importantly, they don't know how long it will last. They need to be ever-vigilant,” says Morningstar’s director of personal finance, Christine Benz.
Much the same as life here in 2019, though perhaps with less grim outcomes.
“You should have an emergency fund for the same general reason; having cash on hand helps you avoid unattractive forms of financing, such as credit cards, if emergency expenses arise. Ideally, your emergency fund should cover you for three to six months' worth of living expenses in case of job loss,” she suggests.
For some, the idea of saving up that much of money could seem daunting. In those circumstances, Howard Kabot, vice-president of financial planning at RBC Wealth Management suggests keeping a line of credit on hand. It doesn’t mean you have to use it, but it’s on hand if the need arises, he says.
“The risks to a line of credit arise when you can’t pay it off, so you must make sure that if you do access it, you pay it off in full, or you’ll end up with debt,” Kabot says. And speaking of debt…
A Lannister always pays his debts
The House Lannister is a central house on the show, and almost every Lannister has used this line at least once. In some cases, the meaning is benevolent, when the character is grateful. In others, the line conveys a malevolent promise.
Just like debt here on Earth – some debts are good, some are bad. “For the most part, debt is unavoidable,” Kabot says, especially if you want to buy a home. Most people will end up taking out a mortgage, as few can afford to pay cash for real estate. This is good debt, Kabot says, as it leads to bettering one’s lifestyle. Another good debt is a loan for education.
“High-interest-rate debt–or any debt, really–is akin to negative investing; the interest you earn in one account is effectively negated by the interest you pay on your debts. That said, some types of debt are a bigger negative than others,” Benz says, pointing out that the way to identify bad debt is to think through whether you could reasonably out-earn the interest you pay through investing.
“If it's high-interest-rate credit card debt, the answer is absolutely not, so your first priority should be to pay it off. Low-interest mortgage debt is "on the bubble"; you probably can't out-earn your interest rate with very safe investments, but now that yields have increased, it's a closer call,” she adds.
Chaos isn't a pit. Chaos is a ladder
The one thing that is certain in Game of Thrones is that chaos is everywhere. Favourite characters die with heartbreaking regularity, villains win for a moment, only to be upended by someone or something else, and the catchphrase of the series is Valar Morghulis, meaning ‘All Men Must Die’.
In investment terms, this might well be about volatility, and the need to actively work against it. Though we may well be lulled into a sense of security by the positive stock market, the last quarter of 2018 was rough, and going ahead, there is the looming threat of a possible recession – though increasingly that seems unlikely.
But as Morningstar Investment Management’s Michael Keaveney reminds us, investors should not fear volatility. “It’s prudent to remind ourselves that volatility is part and parcel of equity investing. Long Term investors should look beyond the monthly noise and focus on the returns that are more likely to unfold over extended periods,” he says.
When you play the Game of Thrones, you win or you die
To win, you need to think critically and clinically, or else you die. Literally. Characters in Game of Thrones lose their heads so often, that fans have learned to not get too attached, or they risk having their hearts broken.
In real life, the stakes are not often that high, but there are risks that all investors need to take into account.
“Gauging your risk appetite is crucial to building a sensible portfolio. There are two key concepts to bear in mind–risk capacity and risk tolerance. Risk capacity relates to how much volatility–and indeed real losses–you could withstand without having to change your plans. Risk tolerance relates to how you feel about losing money in your portfolio,” Benz says.
She adds that risk capacity is especially important if you expect to spend from your portfolio soon; you don't want to have big losses threaten your standard of living in retirement or your ability to make a home down payment, for example. You also need to make sure you have the right amount of risk tolerance, if your portfolio is uncomfortably risky, you might be inclined to make changes at an inopportune time–to sell out of stocks after they've already dropped a lot, for example.
The heart lies and the head plays tricks with us, but the eyes see true
Game of Thrones fans willingly allow themselves to be affected by an emotional rollercoaster. Alas, this is a difference between the show’s fantasy and the real world, but it provides a lesson. Emotions should have no place in an investment portfolio.
Kabot points out that investors should be careful because sometimes, there is a good reason for negative news, and other times, not. “Long-term investing is all about peaks and valleys, and the trick is to live through the valleys while enjoying the peaks,” he says.
“Investors only capture a fraction of their fund's time-weighted returns because they tend to choose investments that already have done well and sell too quickly when their holdings struggle. Put another way, investors buy high and sell low, leaving a chunk of their fund's returns on the table. Investors have emotional responses to securities and their issuers, and that is a permanent feature of the market that can be exploited," says Paul Kaplan, director of research at Morningstar Canada in Toronto.