Fables and fairy tales are poor excuses for an investment philosophy. Too many investors have bet their life savings on the financial version of Science Fiction.
The concept of evidence based investing takes an entirely different approach. Wide diversification, concentration on certain factors, and low investment friction (i.e., minimized taxes and fees) combined with a long-term time frame are the focal points.
Unfortunately, this liberating message reaches too few investors for two reasons. First, commissioned salespeople play on investor fragile psyches. They know people love good stories, especially concerning fear and greed.
Market timing, sector bets, forecasts and leveraged products form the nucleus of these compelling, but reality-deprived, tall tales.
Second, these concepts are too often explained in a colorless and tiresome manner with plenty of jargon thrown in. This makes it tough to attract the attention of investors who are used to a market version of high-speed car chases and explosions from conflicted brokers.
Many times this tale is explained with mind numbing graphs, charts and boredom. This data dump may not be the best way to catch the attention of a population that can’t pass a basic five-question quiz on standard financial concepts.
While attending the DFA Foundations Conference, I was inspired by one of their dynamic speakers, Apollo Lupescu, (who will also be speaking at our conference November 15) to change the delivery of the message.
Evidence based investing works and people love colorful stories with analogies they can relate to.
How about combining these concepts into a powerful message that people will remember and be able to tell their friends about?
Since I spent about twenty years of my life explaining stuff to eighth graders, this qualifies me to create a factual narrative for the average retail investor. This is not an insult, but a fact; most adults know very little about how the markets really work.
Here goes nothing:
So you like to pick stocks and try to time the market. How has that worked out for you? Let me give you an example of another way.
Think of a pretty school of fish swimming somewhere in the Bahamas. Unfortunately, too many become dinner for moray eels and their like.
The good news is the majority make it to their destination unscathed. Wouldn’t it be awful if this was a race and you could have bet on the entire school but you chose the shark bait?
This is what can happen when you try to pick individual stocks. The whole school of the stock market can do pretty well while you lose your shirt because of your concentrated bet on the stragglers.
Wouldn’t it make more sense for you to own 12,000 different stocks from 40 different nations? This seems like a better plan than listening to the commissioned salesperson or your know-it-all brother-in-law and their “can’t miss” tips.
Yes, sometimes the whole school will be in trouble. There will be situations when 50% of these little Nemos will disappear for a while. Eventually they will find their way back to the group and continue their journey.
Owning the stock market will virtually guarantee that more than once in your lifetime this will happen to you. 50% temporary losses are part of the ball game. Think of a roller coaster. The only people who get hurt are those who panic and jump out. Though it seems tempting, you don’t often find lots of bodies underneath the harrowing turns. This too shall pass.
It turns out there may be some schools of fish who are stronger and faster. Betting on these makes the most sense since you will still own plenty of schools.
In the markets, we call this factor investing. Groups of stocks that are smaller, cheaper, and more profitable have been proven to give investors higher returns than the overall market over long periods of time.
This works as long as you stick with the strategy. It is my job to keep you calm and make sure this happens so you won’t end up like the poor guy who jumped out of the rollercoaster.
The numbers prove all of this stuff I am telling you. If you would like to see them for yourself, millions of trees sacrificed their lives for the library of information I possess. I would be happy to explain it to you anytime.
There is only one thing that requires faith from you; belief in capitalism. As long as you are O.K. with the idea that people will continue to want to invent things, purchase stuff, and own own property, we should be good.
This philosophy is all about owning small parts of thousands of global businesses. Doing this has rewarded those investors before you, quite handsomely, for more than a century.
If you’re shaky on this capitalism business, do not buy stocks from anyone. Cheer up! If the system goes dark, the last thing you will be worrying about is your 401k. Zombie Cannibals anyone?
One more thing, there is no Plan B. This is how I invest my own money. My belief in using data as the basis for investment decisions is unshakeable.
If you want to buy stocks or chase the investment flavor of the month, this is not for you. Unfortunately, as the saying goes: “My castle, my rules. This is not Burger King, where you can have it your way. I am here to look out for your best interests, not placate you.”
If this is something that sounds appealing we can discuss it in more detail. If not, no harm, no foul; and best of luck to you.
The financial industry needs more people who can put this stuff into language people can understand. The crew at Ritholtz Wealth Management takes pride in speaking plain English with no bull. If you are intrigued by this approach, get more information here.