A Ulysses Contract

Mark Meredith, CFP®

Ulysses (Greek name Odysseus) was the Greek King of Ithaca and the hero of Homer’s Odyssey. After the Trojan War, Ulysses had a long journey back to Ithaca. Along the way, he had an extended visit with the witch-goddess, Circe, who advised him on the remaining stages of his journey.

Circe warned Ulysses of an island near Scylla which is home to the Sirens. The Sirens were dangerous creatures who lured nearby sailors with beautiful music and singing, to shipwreck on the rocky coast of their island. Circe advised that all of the sailors fill their ears with beeswax so they are not drawn in by the enchanting music. Ulysses wanted to hear the beautiful music though, so Circe suggest that he have his sailors tie him down. He ordered them not to untie him under any circumstances.

As they sailed past the island, Ulysses heard the Sirens enchanting music and demanded that his sailors untie him. They tied him up tighter, and no matter how much he begged they would not release him.

The agreement Ulysses had with his sailors is commonly referred to today as a Ulysses contract. Ulysses made the free decision to bind himself from making a terrible decision that would inflict harm upon himself.

A modern day example would be the party attendee that gives their car keys to their friend at some point in the night and says “Don’t give these back to me no matter what”. Or better yet, in the movie Dodgeball when Ben Stiller gets an electric shock every time he touches a donut.

Investing successfully can be boiled down to two main points:

  1. Knowing the nuts and bolts of constructing a well diversified efficient portfolio.
  2. Having a strong temperament.

If you have number 1 but not number 2, you’re probably doomed. Although, not many would ever be able to look themselves in the mirror and acknowledge they have poor investor temperament so it takes careful self-examination. Us investors are like the kids at Lake Wobegon, we are all above average.

If you have number 2 but not number 1, you can get away with it to some degree. But you also may create a terrible portfolio and stick with it way too long because you have tuned out the noise a little too much.

So what should people do? Hire a financial advisor. Shameless plug, I know. Don’t worry, I won’t tie you to a boat, but yes I may consider using beeswax if you insist on watching Jim Cramer.

It does seem many people hire an advisor to solve point #1 above, but #2 is just as valuable, possibly more so. Hiring an advisor can be viewed as entering into a Ulysses contract, and keeping one from self inflicted wounds.

I did not know the market would bottom around March 23rd, but I did have suspicion we were close. Why? Around that time is when I received calls from a few very worried investors. It is understandable, as the velocity of the drop was remarkable. The recovery thus far has also been remarkable, as Aswath Damodaran tweeted yesterday the S&P 500 has had its best 50-day run in history.

Ulysses took Circe’s advice by allowing his men to tie him up. As painful as it was for him to hear the Sirens and not be able to jump in and swim towards them, it was the best course of action.

Investing successfully will almost certainly involve great deals of pain at times, but as Charlie Munger puts it “If you cannot manage to endure significant declines 4 or 5 times in your life, you deserve the mediocre results you are going to get”.

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