Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
"As I mentioned earlier, by definition every stock must be held by someone. So when Mom and Pop buy stocks, they must buy them from someone else, and when they sell them, they must sell them to someone else. Let’s call those other parties “X.” The market rises, Mom and Pop want in, so they buy stocks from X. The market tanks again, and they rush to sell. X buys the stock back.
What we know is that X is timing the market, and he or she is making an absolute fortune. That’s because while Mom and Pop keep buying high and selling low, X manages to buy low and sell high, simply by trading with Mom and Pop."
Well, that's certainly consistent with everything we know about the smartness of "the smart money." A coldly calculating crafty bunch who have made fortunes investing in hugely profitable hedge f . . . oh, wait. No, those investments have pretty much gouged them.
Arguments about the behavior of "smart money" strike me as inherently silly. In 2010, 67% of all stocks were owned by institutions. Increasingly institutional managers are afflicted by short-termism and a focus on frequently shifting tactical allocations. Which is to say, the smart money is selling to and buying from the rest of the smart money rather more frequently than from mom and pop.
What are the claim that "genius X" is selling the market? The short answer is, some genius is always selling the market. Grantham and Hussman have been negative on the market for years. They're brilliant but, as Howard Marks once wrote, "Being far ahead of your time is indistinguishable from being wrong."
I suspect that the better argument is that the market works to transfer money from the undisciplined to the disciplined. Many of us, great and small, have neither a coherent plan nor the wherewithal to stick with one and so our actions consistently enrich others.
Thanks David, great comments and so true. Additionally, a smart well disciplined small investor is, as you previously mentioned in another thread, only mildly interesting to the Financial idustry so there is little help out there to orchestrate your discipline and skills. A small investor is up against a system designed to separate them from their principal and profits by offering limited investment options in retirement plans, by gleaning off 1-2% through on going expenses, and assessing trading and early redemption fees.
And most of us thought making money was hard...try making it grow!
Thanks as well David, excellent piece. And Bee is spot on with the small investor having limited options.
There is one, worthy investment option, not often discussed here, which does avail itself to many individual, Mom and Pop investors.
The option is to hire a financial services firm, Not a Stock Broker, to serve as your personal investment manager. Fees run about 1% to 1.45%.
Repeat Not A Stock Broker. (I've fired way too many brokers, to me they're generally all the same).
I became frustrated with my own stock and mutual fund selections, as well as my risk adjusted gains as the market rotated away from bonds to mid caps, small caps, market neutrals, perferred, convertibles etc. Then trying to control my own emotions, and foresee future market rotations requires skills I don't have. I've had a little success over the last 40 years, but the enviroment is changing.
Being retired I couldn't afford a major blunder or being wrong every five to seven years as David points out. I got tired of not sleeping at night, because the ground is shifting.
My Fidelity advisor and I were discussing this fact, and he made a suggestion that I'd never considered. Apparently Fidelity realized there were many of us thinking the same way.
My advisor in Tampa, through a Fidelity screening and interview process, suggested a four major investment firms that operate according to a strict Fidelity standards of practice arrangement.
In my case, four firms that met my guidelines were recommended from around the country. I spent a month interviewing them, and landed on one firm outside my state, but I'll cut that story short. Eye opening to say the least.
In my case the chosen firm manages assets of $40 Billion. The firm and I, after extensive conversations, set up various portfolios for me which are modeled to meet my goals with various timelines, and cash flow models. Highly sophisticated. Highly sophisticated indeed.
They don't use mutual funds.
These firms operate through internal investment committees. They have as many as 60 Certified financil analysists choosing the investments. They don't want my opinion or my emotions or my input. But my client relations advisor there is a CFP.
The firm often will make a change or move every few days. Very transparent and I view all the allocation adjustments on my Fido site. They prove you don't have to take excessive risk to make money.
Lastly, some of the stocks I owned previously were retained. But the firms buy and sell models are based on analytical formula's.
The firm may like a stock, but it may like it's preferred stock better, or it's convertible better or they may buy puts or calls instead of the individual stock. Few of these strategies I'd ever feel comfortable using on my own, with limited information. But the way they do it, is most interesting. It's active management but not too churning.
Lastly there are a number of these firms who you'd never know even exist, but to whom great fortunes are entrusted.
As the MarketWatch article claims, Mom and Pop are poor market timers; they typically zigg when they should be zagging. A ton of research establishes that as fact including the data sets from Dalbar that are referenced in the article.
But they are not alone. Simple money conservation-like law balances demand that, on a global scale, everyone who trades often suffers wealth erosion because of trading friction. All market timing traders are eventually losers. As John Bogle consistently emphasizes, the only winners are the croupiers, the Casino owners.
What is true statistically for Mom and Pop is equally true for day-traders, for mutual funds, and for institutional investors alike. Scores of detailed boring academic studies support the assertion that these talented money managers suffer the same shortfalls that Mom and Pop suffer. Smart money is a myth cultivated by those wishing to sell an overly-hyped, defective product. It is close to a universal finding.
But it is not absolutely universal. There are a scattered few among us who defy the odds and accumulate excessive rewards over time. Just ask Warren Buffett. The sometimes painful search for the Holy Grail continues. Sir Winston Churchill famously remarked: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”.
I’m a representative of the Mom and Pop cohort and I’m an optimist. While most of our group has lacked the discipline and patience to succeed, many others have thrived in the financial marketplace. I personally know folks who have crafted a plan, have diligently executed that plan, and have become multi-millionaires along the way.
It is not easy, but it can be done, especially when costs are controlled with a mix of passive Index funds and some prescient active management selections. Some of the Mom and Pop population do just fine, even remarkably well. A little luck also helps.
Alexander Graham Bell had it mostly right with his observation that is now the motto of Bell Labs: “ Leave the beaten track occasionally and dive into the woods. Every time you do so you will be certain to find something you have never seen before”. That’s as insightful for investing as it is for scientific research.
The cautionary warning is that many wilderness pathways, both in science and investing, lead nowhere, are costly mistakes and can lead to ruin. The trick is to recognize and abandon any misguided errors quickly.
Which leads me to a troublesome observation. I worry over SteveS’ decision to employ a costly financial advisor who has been granted the option to trade whenever the advisory team deems it profitable. I understand that some folks really do need such portfolio management first-aid, but not many, and certainly even fewer who participate in MFO exchanges.
Simply put, the incremental costs of such a service are going to severely truncate any anticipated extra performance. I doubt that many advisory teams have the capability to generate excess returns in the 2 % annual range consistently. They need that 2 % minimum just to pay for their management fees and the extra costs associated with frequent trading. The fees are likely to swallow 20 to 30 % of the expected forward-looking rewards.
The odds of a portfolio manager persistently achieving a 2 % annual positive excess return are miniscule. History reinforces my assertion. Also I worry over giving trading control to a third party regardless of his credentials.
History shows that a 2 % excess return over time is a marvelous, seldom seen happening. SteveS, I wish you well and hope you reach that target. I fear that it is a bridge too too far. Monitor closely. Your post suggests that you will indeed do that task with vigor. Good luck.
I wanted t to add something. X is also selling stock he does not have. Otherwise known as FTD - Failure to Deliver. So not only is X selling to Mom and Pop - who by the way are supposed to think "long term" and make a "value play" so they "buy and hold" to riches (not) - he is creating an artificial supply of stock he does not have. Also known as Naked Short Selling.
Meanwhile X shorts the stock massively. Game Over.
So to the answer to the original question - Will Mom and Mop investors blow it again? - is not a simple "Yes". It is not even a "Hell Yes". The answer to that question is Mom and Pop should never BUY stock outright PERIOD. They should always sell a PUT few dollars below stock price and collect a premium. Make X come DOWN to sell stock to you. If he doesn't, Mom and Pop happily let PUT expire and keep the money.
This POP makes 1% risk free all the time. The POP of course does not win. What does 1% do? Well it does more than MM fund. However, he does not blow it either. Now only if MOM took a little more interest in what POP does, they would make 2% or even 3%.
Hmmm...MOM is an etf, but POP is not...Ishares needs to work on this injustice. You probably have seen the presentation, "The Darkside of the Looking Glass". A little dated (2006), but still relevant and worth your time if you haven't seen it.
The financial system has a number of areas ripe for reform...Naked Short Selling is just one.
Hi Steve, I'd be more than happy to give the name of the firm, but I asked them to be keep my business confidential and I'll respect their confidence in kind.
The firm I chose representated what I was looking for. Each of us has different goals, investment amounts and time lines. So it might not be the best one for someone else.
My sole reason for the post, was only to mention there are available options for the investor; some being more suitable than others. But there are always options.
Index funds are great, and they are reasonable. But which ones?? There are hundreds. Was at a crossroads. Where do we go next.
I wanted world class companies in moat areas, solid dividends, excellent U.S. and International growth companies, the best preferred stocks possible, the best convertible bonds within my reach to mitigate bonds, market neutral investments with dividends. And a constrained risk profile.
And at 64 years old, so it's very important to me not to play "Stock Market" all day long or at 3:00 AM at night. I'm retired. Other things to do and worry about.
After the firm took over, I felt that I'd been a blind man walking without a cane stumbling in the dark.
And yeah... they do charge for their service. For me it works out to .85%. I can live with that. Do I want to pay it. Yes, actually it's more than fair for what they've brought to the table.
Reply to @SteveS: Welome to MFO...Just so you and others fully understand what a 1-2% service charge means to your bottom line I included the growth of a single investment of $10,000 made when someone is 25. After 40 years...retirement age of 65... a 1-2% service charge would provide enough money for you and your financial planner to equally share in your retirement while you took all the risk and you provided all the hard work...with little or no risk on the financial planners behalf.
You sound smart enough to be able to generate a 7% return over 40 years without any help from an advisor, but if you would prefer less...6% or 5%...I'm sure there are plenty of financial planners who will "help" get you that too.
Over 40 years, that 1% difference equates to you "handing over" a chance to hold 50% more in profits ($70K vs $102K) (5% vs 6% return)...take a look at the difference between a 5% average return vs a 7% average return...tuly astounding profits for the fianacial planner when you consider you take all the risk.
Reply to @bee: You know bee, the same argument made against actively managed mutual fund too. If one is going to assume market risk, then it makes sense to be in index funds. It also assumes one stays invested in index funds, and assumes one invests all the money at the beginning of the investment period (40 years or otherwise), and one doesn't suffer a 50% drop in the last 1-2 years of that investment period. Then it is claimed the actively managed fund would have steered one clear of the market because the manager is good !!!
So the story goes...who knows how it ends? Really, why don't we all invest in index funds? We suck!
Reply to @SteveS: That's a pretty good story Steve. I'm 59 and planning to retire at least from full time work at 62, so I have been having the same thoughts and concerns about investing for the future as you. I enjoy the mutual fund game but I don't fool myself in thinking I'm making more then a financial fiduciary could do for me. No offense to Bee, but the simple spreadsheet comparison shown below isn't very useful in predicting ones outcome. Frankly, making 7% return in a conservative fashion during retirement is wishful thinking. At the very least, it shouldn't be counted on in your calculations. There are way to many variables, both economically, emotionally and unknown, that interfere with consistent returns.
Reply to @VintageFreak: Good points. A 50% drop is like a burst water pipe while fees are like a leaky faucet...you'll get around to fixing a busted pipe pretty quick, but the unnoticed slow drip will siphon off more water over time.
I seriously doubt that as investors “we suck”. I’m sure some of us do; I’m equally sure that most of us do not suck. I do not suck; you do not suck.
We often make misguided investment decisions, but being 100 % correct when forecasting future market movements is an impossible standard. The unknowns and unknowables overwhelm the knowns.
Don’t judge yourself so harshly. Experts make faulty decisions just as often as we do.
Taken in isolation, brainpower is not sufficient by itself. From the dustbin of history, Sir Isaac Newton lost a fortune in the South Sea bubble; Albert Einstein lost when he overcommitted to failed municipal bonds early in the 20th century. John Maynard Keynes recorded a rocky up-down financial career with his beauty contest approach to investing.
Recently Nobel laureates and economists Robert Merton and Myron Schols were founding members of the Long Term Capital Management debacle. Physicist John Allen Paulos unwisely had a love affair with WorldCom stock while sacrificing 90 % of his investment to bad practices. He did write a book, “A Mathematician Plays the Stock Market”, so he likely recovered from some of his misfortunes.
My takeaway is that scientists are not immune to the same investment foibles that endanger and compromise our investment decision making.
Brainpower is a positive asset, but it must be supplemented with large inputs of knowing the rules and the odds of the investment playing field. A little commonsense also is beneficial. The other side of the investment coin is familiarity with the many pitfalls and traps that snarl neophyte investors
Paul Merriman has an excellent article that identifies 17 common traps. Avoiding these wealth eroding traps should remove anyone from the Sucks list.
Mistake #1: No written plan Mistake #2: Procrastination Mistake #3: Taking too much risk Mistake #4: Taking too little risk Mistake #5: Paying too much money to others Mistake #6: Trusting institutions Mistake #7: Believing publications Mistake #8: Failing to take little steps that can sometimes make a big difference Mistake #9: Buying illiquid financial products Mistake #10: Requiring perfection in order to be satisfied Mistake #11: Accepting investment advice and referrals from amateurs Mistake #12: Letting emotions – especially greed and fear – drive investment decisions Mistake #13: Putting too much faith in recent performance Mistake #14: Failing to resolve disagreements between spouses Mistake #15: Focusing on the wrong things Mistake #16: Not understanding how investing works Mistake #17: Needing proof before making a decision
Sage advice. Making just a couple of these errors can be ruinous to portfolio health. Merriman concludes the article with recommendations to avoid these pitfalls. Applying his experience-based observations might just save everyone more than a few bucks. Here is the Link to the complete paper:
Please give it a try. It’s worth your time commitment.
Vintage Freak, the marketplace is a tough demanding master. But it can be controlled with discipline and patience. Just review the Lazy-Man performance record that is often referenced in MFO postings.
The long term performance of all these simple options hover around the 7 % annual rate of return. These are accessible, real, and are realistic expectations for market rewards. They demonstrate that investing can be made simple.
But simple does not necessarily equate to easy. It takes work. Sometimes it is not easy to overcome behavioral biases, greed, and the devil renegade in each of us.
Reply to @MJG: I agree with what you are saying. The thing is we may all agree on one thing but not on the other. What to do, yes, but now how to do it.
Some people hopefully only investing in Index funds. I for one, developing my own criteria for what is a good fund. Performance is not end all or be all. Honestly, not even looking at performance, but rather consistency of it, risk handling, manager investment, manager morals, manager attitude. For example I own Bridgeway because they donate 50% to charity and have highest employee pay < 7 times lowest employee pay. Even the much maligned Hussman donates 60% of profits to charity.
If we are not investing in index funds, we better have very good reasons individually for investing in active funds. I hope those reasons never make us invest with the likes of Bill Miller.
Comments
What we know is that X is timing the market, and he or she is making an absolute fortune. That’s because while Mom and Pop keep buying high and selling low, X manages to buy low and sell high, simply by trading with Mom and Pop."
Well, that's certainly consistent with everything we know about the smartness of "the smart money." A coldly calculating crafty bunch who have made fortunes investing in hugely profitable hedge f . . . oh, wait. No, those investments have pretty much gouged them.
Arguments about the behavior of "smart money" strike me as inherently silly. In 2010, 67% of all stocks were owned by institutions. Increasingly institutional managers are afflicted by short-termism and a focus on frequently shifting tactical allocations. Which is to say, the smart money is selling to and buying from the rest of the smart money rather more frequently than from mom and pop.
What are the claim that "genius X" is selling the market? The short answer is, some genius is always selling the market. Grantham and Hussman have been negative on the market for years. They're brilliant but, as Howard Marks once wrote, "Being far ahead of your time is indistinguishable from being wrong."
I suspect that the better argument is that the market works to transfer money from the undisciplined to the disciplined. Many of us, great and small, have neither a coherent plan nor the wherewithal to stick with one and so our actions consistently enrich others.
Grumpily,
David
Thanks David, great comments and so true. Additionally, a smart well disciplined small investor is, as you previously mentioned in another thread, only mildly interesting to the Financial idustry so there is little help out there to orchestrate your discipline and skills. A small investor is up against a system designed to separate them from their principal and profits by offering limited investment options in retirement plans, by gleaning off 1-2% through on going expenses, and assessing trading and early redemption fees.
And most of us thought making money was hard...try making it grow!
There is one, worthy investment option, not often discussed here, which does avail itself to many individual, Mom and Pop investors.
The option is to hire a financial services firm, Not a Stock Broker, to serve as your personal investment manager. Fees run about 1% to 1.45%.
Repeat Not A Stock Broker. (I've fired way too many brokers, to me they're generally all the same).
I became frustrated with my own stock and mutual fund selections, as well as my risk adjusted gains as the market rotated away from bonds to mid caps, small caps, market neutrals, perferred, convertibles etc. Then trying to control my own emotions, and foresee future market rotations requires skills I don't have. I've had a little success over the last 40 years, but the enviroment is changing.
Being retired I couldn't afford a major blunder or being wrong every five to seven years
as David points out. I got tired of not sleeping at night, because the ground is shifting.
My Fidelity advisor and I were discussing this fact, and he made a suggestion that I'd never considered. Apparently Fidelity realized there were many of us thinking the same way.
My advisor in Tampa, through a Fidelity screening and interview process, suggested a four major investment firms that operate according to a strict Fidelity standards of practice arrangement.
In my case, four firms that met my guidelines were recommended from around the country. I spent a month interviewing them, and landed on one firm outside my state, but I'll cut that story short. Eye opening to say the least.
In my case the chosen firm manages assets of $40 Billion. The firm and I, after extensive conversations, set up various portfolios for me which are modeled to meet my goals with various timelines, and cash flow models. Highly sophisticated. Highly sophisticated indeed.
They don't use mutual funds.
These firms operate through internal investment committees. They have as many as 60 Certified financil analysists choosing the investments. They don't want my opinion or my emotions or my input. But my client relations advisor there is a CFP.
The firm often will make a change or move every few days. Very transparent and I view all the allocation adjustments on my Fido site. They prove you don't have to take excessive
risk to make money.
Lastly, some of the stocks I owned previously were retained. But the firms buy and sell models are based on analytical formula's.
The firm may like a stock, but it may like it's preferred stock better, or it's convertible better or they may buy puts or calls instead of the individual stock. Few of these strategies I'd ever feel comfortable using on my own, with limited information. But the way they do it, is most interesting. It's active management but not too churning.
Lastly there are a number of these firms who you'd never know even exist, but to whom great fortunes are entrusted.
Good Investing,
Steve
As the MarketWatch article claims, Mom and Pop are poor market timers; they typically zigg when they should be zagging. A ton of research establishes that as fact including the data sets from Dalbar that are referenced in the article.
But they are not alone. Simple money conservation-like law balances demand that, on a global scale, everyone who trades often suffers wealth erosion because of trading friction. All market timing traders are eventually losers. As John Bogle consistently emphasizes, the only winners are the croupiers, the Casino owners.
What is true statistically for Mom and Pop is equally true for day-traders, for mutual funds, and for institutional investors alike. Scores of detailed boring academic studies support the assertion that these talented money managers suffer the same shortfalls that Mom and Pop suffer. Smart money is a myth cultivated by those wishing to sell an overly-hyped, defective product. It is close to a universal finding.
But it is not absolutely universal. There are a scattered few among us who defy the odds and accumulate excessive rewards over time. Just ask Warren Buffett. The sometimes painful search for the Holy Grail continues. Sir Winston Churchill famously remarked: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty”.
I’m a representative of the Mom and Pop cohort and I’m an optimist. While most of our group has lacked the discipline and patience to succeed, many others have thrived in the financial marketplace. I personally know folks who have crafted a plan, have diligently executed that plan, and have become multi-millionaires along the way.
It is not easy, but it can be done, especially when costs are controlled with a mix of passive Index funds and some prescient active management selections. Some of the Mom and Pop population do just fine, even remarkably well. A little luck also helps.
Alexander Graham Bell had it mostly right with his observation that is now the motto of Bell Labs: “ Leave the beaten track occasionally and dive into the woods. Every time you do so you will be certain to find something you have never seen before”. That’s as insightful for investing as it is for scientific research.
The cautionary warning is that many wilderness pathways, both in science and investing, lead nowhere, are costly mistakes and can lead to ruin. The trick is to recognize and abandon any misguided errors quickly.
Which leads me to a troublesome observation. I worry over SteveS’ decision to employ a costly financial advisor who has been granted the option to trade whenever the advisory team deems it profitable. I understand that some folks really do need such portfolio management first-aid, but not many, and certainly even fewer who participate in MFO exchanges.
Simply put, the incremental costs of such a service are going to severely truncate any anticipated extra performance. I doubt that many advisory teams have the capability to generate excess returns in the 2 % annual range consistently. They need that 2 % minimum just to pay for their management fees and the extra costs associated with frequent trading. The fees are likely to swallow 20 to 30 % of the expected forward-looking rewards.
The odds of a portfolio manager persistently achieving a 2 % annual positive excess return are miniscule. History reinforces my assertion. Also I worry over giving trading control to a third party regardless of his credentials.
History shows that a 2 % excess return over time is a marvelous, seldom seen happening. SteveS, I wish you well and hope you reach that target. I fear that it is a bridge too too far. Monitor closely. Your post suggests that you will indeed do that task with vigor. Good luck.
Best Regards.
Can you tell us the name of the firm?
Steve
Meanwhile X shorts the stock massively. Game Over.
So to the answer to the original question - Will Mom and Mop investors blow it again? - is not a simple "Yes". It is not even a "Hell Yes". The answer to that question is Mom and Pop should never BUY stock outright PERIOD. They should always sell a PUT few dollars below stock price and collect a premium. Make X come DOWN to sell stock to you. If he doesn't, Mom and Pop happily let PUT expire and keep the money.
This POP makes 1% risk free all the time. The POP of course does not win. What does 1% do? Well it does more than MM fund. However, he does not blow it either. Now only if MOM took a little more interest in what POP does, they would make 2% or even 3%.
POP will continue dreaming...
Hmmm...MOM is an etf, but POP is not...Ishares needs to work on this injustice. You probably have seen the presentation, "The Darkside of the Looking Glass". A little dated (2006), but still relevant and worth your time if you haven't seen it.
The financial system has a number of areas ripe for reform...Naked Short Selling is just one.
Hard link:
The Darkside of the Looking Glass
The firm I chose representated what I was looking for. Each of us has different goals,
investment amounts and time lines. So it might not be the best one for someone else.
My sole reason for the post, was only to mention there are available options for the investor; some being more suitable than others. But there are always options.
Index funds are great, and they are reasonable. But which ones??
Was at a crossroads. Where do we go next.
I wanted world class companies in moat areas, solid dividends, excellent U.S. and International growth companies, the best preferred stocks possible, the best convertible bonds within my reach to mitigate bonds, market neutral investments with dividends. And a constrained risk profile.
And at 64 years old, so it's very important to me not to play "Stock Market" all day long or at 3:00 AM at night. I'm retired. Other things to do and worry about.
After the firm took over, I felt that I'd been a blind man walking without a cane stumbling in the dark.
And yeah... they do charge for their service. For me it works out to .85%. I can live with that. Do I want to pay it. Yes, actually it's more than fair for what they've brought to
the table.
Best as Always,
Steve
Welome to MFO...Just so you and others fully understand what a 1-2% service charge means to your bottom line I included the growth of a single investment of $10,000 made when someone is 25. After 40 years...retirement age of 65... a 1-2% service charge would provide enough money for you and your financial planner to equally share in your retirement while you took all the risk and you provided all the hard work...with little or no risk on the financial planners behalf.
You sound smart enough to be able to generate a 7% return over 40 years without any help from an advisor, but if you would prefer less...6% or 5%...I'm sure there are plenty of financial planners who will "help" get you that too.
Over 40 years, that 1% difference equates to you "handing over" a chance to hold 50% more in profits ($70K vs $102K) (5% vs 6% return)...take a look at the difference between a 5% average return vs a 7% average return...tuly astounding profits for the fianacial planner when you consider you take all the risk.
So the story goes...who knows how it ends? Really, why don't we all invest in index funds? We suck!
Anyway, thanks for the post.
I seriously doubt that as investors “we suck”. I’m sure some of us do; I’m equally sure that most of us do not suck. I do not suck; you do not suck.
We often make misguided investment decisions, but being 100 % correct when forecasting future market movements is an impossible standard. The unknowns and unknowables overwhelm the knowns.
Don’t judge yourself so harshly. Experts make faulty decisions just as often as we do.
Taken in isolation, brainpower is not sufficient by itself. From the dustbin of history, Sir Isaac Newton lost a fortune in the South Sea bubble; Albert Einstein lost when he overcommitted to failed municipal bonds early in the 20th century. John Maynard Keynes recorded a rocky up-down financial career with his beauty contest approach to investing.
Recently Nobel laureates and economists Robert Merton and Myron Schols were founding members of the Long Term Capital Management debacle. Physicist John Allen Paulos unwisely had a love affair with WorldCom stock while sacrificing 90 % of his investment to bad practices. He did write a book, “A Mathematician Plays the Stock Market”, so he likely recovered from some of his misfortunes.
My takeaway is that scientists are not immune to the same investment foibles that endanger and compromise our investment decision making.
Brainpower is a positive asset, but it must be supplemented with large inputs of knowing the rules and the odds of the investment playing field. A little commonsense also is beneficial. The other side of the investment coin is familiarity with the many pitfalls and traps that snarl neophyte investors
Paul Merriman has an excellent article that identifies 17 common traps. Avoiding these wealth eroding traps should remove anyone from the Sucks list.
Mistake #1: No written plan
Mistake #2: Procrastination
Mistake #3: Taking too much risk
Mistake #4: Taking too little risk
Mistake #5: Paying too much money to others
Mistake #6: Trusting institutions
Mistake #7: Believing publications
Mistake #8: Failing to take little steps that can sometimes make a big difference
Mistake #9: Buying illiquid financial products
Mistake #10: Requiring perfection in order to be satisfied
Mistake #11: Accepting investment advice and referrals from amateurs
Mistake #12: Letting emotions – especially greed and fear – drive investment decisions
Mistake #13: Putting too much faith in recent performance
Mistake #14: Failing to resolve disagreements between spouses
Mistake #15: Focusing on the wrong things
Mistake #16: Not understanding how investing works
Mistake #17: Needing proof before making a decision
Sage advice. Making just a couple of these errors can be ruinous to portfolio health. Merriman concludes the article with recommendations to avoid these pitfalls. Applying his experience-based observations might just save everyone more than a few bucks. Here is the Link to the complete paper:
http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdf
Please give it a try. It’s worth your time commitment.
Vintage Freak, the marketplace is a tough demanding master. But it can be controlled with discipline and patience. Just review the Lazy-Man performance record that is often referenced in MFO postings.
The long term performance of all these simple options hover around the 7 % annual rate of return. These are accessible, real, and are realistic expectations for market rewards. They demonstrate that investing can be made simple.
But simple does not necessarily equate to easy. It takes work. Sometimes it is not easy to overcome behavioral biases, greed, and the devil renegade in each of us.
Some luck is always needed.
Best Regards.
Some people hopefully only investing in Index funds. I for one, developing my own criteria for what is a good fund. Performance is not end all or be all. Honestly, not even looking at performance, but rather consistency of it, risk handling, manager investment, manager morals, manager attitude. For example I own Bridgeway because they donate 50% to charity and have highest employee pay < 7 times lowest employee pay. Even the much maligned Hussman donates 60% of profits to charity.
If we are not investing in index funds, we better have very good reasons individually for investing in active funds. I hope those reasons never make us invest with the likes of Bill Miller.
To each his/her own.