The Evidence-Based Investor

Tag Archive: Peter Bernstein

  1. Market efficiency is nothing new

    Comments Off on Market efficiency is nothing new

     

     

    There is a perception that underperforming fund managers are a recent development, and that only in the last few years have the financial markets become very hard to beat. But as a new book by FT journalist Robin Wigglesworth reminds us, it was shown as long ago as 1933 that the number of financial professionals outperforming the Dow Jones Industrial Average was consistent with random chance. As ROBIN POWELL explains, market efficiency is an inconvenient truth that people still don’t want to acknowledge.

     

    Faced with the choice, JK Galbraith once wrote, between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.

    That truism has been borne out again and again over the centuries. The first clinical trial showed, in the 1740s, that lemon juice could prevent scurvy, and yet sailors were still contracting it more than 200 years later. There was wide consensus among academics in the 1940s of a link between cigarettes and cancer, yet smoking remains one of the world’s biggest killers today. Concerns about global warming can arguably be dated back to the 1860s, perhaps even earlier; yet we still can’t get our act together on how to tackle it.

     

    An inconvenient truth

    Another inconvenient truth that human beings have struggled with is that financial markets are very hard to beat. And, as Robin Wigglesworth reminds us in Trillions, his new book on the rise of index investing, it’s a truth that’s been staring us in the face for far longer than most people realise.

    There are so many valuable takeaways from this outstanding book, but one of the most important one, in my view, for those who don’t know it already, is that market efficiency is nothing new.

    For Wigglesworth, the “godfather of index investing” was the French mathematician Louis Bachelier. We’ve written about Bachelier several times on TEBI. It was his PhD thesis, The Theory of Speculation, published in 1900,  which essentially explained why markets are hard to beat. But it was an American, Alfred Cowles III, who first demonstrated, statistically, just how hard it is.

     

    Can forecasters forecast?

    Cowles, who came from a family of newspaper owners, gave up his job at the Chicago Tribune to focus on finance when he developed tuberculosis. In 1927 he began collecting information on the equity investments made by the big financial institutions of the day and on the recommendations of market forecasters in the media. 

    Cowles compared the performance of both the professionals and the forecasters with the returns delivered by the Dow Jones Industrial Average, and his findings were published in 1933 in a paper entitled Can Stock Market Forecasters Forecast? The financial institutions, he found, produced returns that were 1.20% a year worse than the index; the media forecasters trailed the index by a massive 4% a year.

    11 years later, in 1944, Cowles published a larger study, based on nearly 7,000 market forecasts over a period of more than 15 years. In it he concluded once again that there was no evidence to support the ability of professional forecasters to predict future market movements. 

     

    James Lorie and the launch of CRSP

    But Alfred Cowles wasn’t the only one to call out the asset management industry long before the advent of index funds. In 1960, James Lorie, associate dean of Chicago’s business school, established the Center for Research in Security Prices (CRSP). With the help of his computer-savvy colleague Lawrence Fisher, he set out to build on Cowles’ work by comparing the returns delivered by Wall Street money managers with the returns of the market as a whole.

    When their findings were published in 1964 they caused quite a stir. Someone investing in all of the stocks on the New York Stock exchange in 1926, Lorie and Fisher found, and reinvesting all the dividends, would have made nine per cent annually by 1960 — far higher than previously thought. And since 1950 the average annual rate of return had been more than ten per cent.

    James Lorie had little regard for professional fund managers. “(They) are competent, responsible professionals” he said in a speech in 1965. “Yet throwing darts at lists of stocks and dates is on the average as satisfactory a method of making investments as is reliance on competent professional judgment.”

     

    The obvious question

    Now the obvious question here is this: given that the evidence presented by Cowles and Lorie was so strong, why did it take so long for lessons to be learned? Why did investors have to wait until 1975 for the first retail index fund? And why is active management still the dominant mode of investing even now, at the end of 2021?

    There are probably many reasons. The power of the industry lobby and the large advertising budgets at the disposal of the major fund houses have undoubtedly played a part, as has the growth of the financial media, which is largely paid for by industry advertising.

    But it was Alfred Cowles himself who put his finger on arguably the biggest factor behind the enduring appeal of active management. Late in life, Cowles was interviewed about his research into market forecasters. In Peter Bernstein’s 1992 book, Capital Ideas: The Improbable Origins of Wall Street, he is quoted as saying this:

     

    “Even if I did my negative surveys every five years, or others continued them when I’m gone, it wouldn’t matter. People are still going to subscribe to these services. They want to believe that somebody really knows. A world in which nobody really knows can be frightening.”

     

    That prediction has proved to be spot on. Active management is a far bigger industry, and market forecasts even more popular, today than when Cowles died in 1984. And now a new generation is emerging, seemingly as confident as ever that it really is possible (easy, in fact) to beat the market in the long run on a cost- and risk-adjusted basis.

    Sadly, Father Christmas doesn’t exist just because we want him to. And, sorry kids, there isn’t a for system for consistently beating the stock market either.

     

    Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever by Robin Wigglesworth is published by Penguin Random House.

     

    ROBIN POWELL is the editor of The Evidence-Based Investor. He is a journalist specialising in finance and investing He is the founder of Ember Television and Regis Media, and is Head of Client Education for the financial planning firm RockWealth. His book, Invest Your Way to Financial Freedom, co-authored with Ben Carlson, was recently published by Harriman House.

     

    MEET ROBIN WIGGLESWORTH

    Robin Wigglesworth is based in New York, but we are hoping to arrange an event in London, strictly for financial advisers, at which Robin will talk about his book. The plan is to hold it in late March and we will confirm the details as and when we have them.

     

    CONTENT FOR ADVICE FIRMS

    Through our partners at Regis Media, TEBI provides a wide range of high-quality content for financial advice and planning firms. The material is designed to help educate clients and to engage with prospects.  

    As well as exclusive content, we also offer pre-produced videos, eGuides and articles which explain how investing works and the valuable role that a good financial adviser can play.

    If you would like to find out more, why not visit the Regis Media website and YouTube channel? If you have any specific enquiries, email Sam Willet, who will be happy to help you.

     

    Picture: Dan Smedley via Unsplash

     

    © The Evidence-Based Investor MMXXI

     

     

     

  2. The only way to be a buy-and-hold investor

    Comments Off on The only way to be a buy-and-hold investor

     

    This tale is part of LARRY SWEDROE’s Investor Tales series. Unless otherwise specified, the tales are hypothetical scenarios, designed to educate the reader on investment principles.

     

    In early 2000, Cathy called Brenda to invite her to an investment seminar sponsored by her CPA. She told Brenda the seminar was part of a series. She had enjoyed the prior sessions and thought Brenda would too. Brenda was sceptical; her experience was that investment seminars were really sales presentations. Cathy assured her this seminar would be purely educational. With that assurance, Brenda agreed to join her.

    The speaker began by stressing the importance of developing an investment plan before any investment decisions are made. She emphasised this point by explaining that without a plan it would be impossible to properly evaluate how any decision would impact the overall risk, and the likelihood of success, of an investment strategy.

    She then explained how important it is to understand there is no one “right” plan. Each plan should be based on an investor’s unique ability, willingness and need to take risk. The plan should take into account such factors as the stability of the investor’s earned income, their investment horizon and their current level of wealth relative to their need for investment income. She also stressed the importance of diversification and the need to avoid the “too many eggs in one basket” syndrome.

    She then explained that the only effective way to build a truly globally diversified portfolio is through mutual funds or exchange traded funds. She emphasised that having a well-developed plan was only the necessary condition for investment success. She presented the evidence on the failure of market-timing efforts to deliver on the promise of superior returns and the inability to avoid bear markets. Thus, the sufficient condition for investment success is to be a disciplined, patient, long-term, buy-and-hold investor.

    After the seminar, Cathy introduced Brenda to her CPA, Erica. They both thanked Erica for an entertaining and educational program. Cathy noted that she was particularly impressed by the slides on the failure of efforts to successfully time the market—too much of the returns occurred over brief and obviously random periods.

    Brenda said she’d been told early in her career that the winning strategy was to be a buy-and-hold investor, and she was particularly proud she’d been investing with Fidelity Magellan Fund for more than 20 years and had never sold any shares. The conversation proceeded as follows.

    Erica: I’m glad both of you enjoyed the seminar. There’s one point I believe is worth going over. Unfortunately, many investors make a mistake when implementing a buy-and-hold strategy. There’s really only one way to ensure that your investment plan, or asset allocation, remains what you want it to be. That way is to invest in only passively managed funds such as index funds and other funds that invest systematically in a transparent and replicable manner.

    Investors who use actively managed funds to implement their asset allocation often have their strategy undermined by market-timing efforts and the resulting style drift that accompany active management. So, Brenda, while you were being a disciplined, patient, passive investor, holding your Fidelity fund for more than 20 years, the fund manager was active, undoing your buy-and-hold strategy. Let me explain.

    The charters of most actively managed mutual funds give their portfolio managers the freedom to shift allocations between asset classes at their discretion. Investors in such funds not only lose control of their asset allocation decisions but also end up taking unintended risks by unknowingly investing in markets, or types of instruments, they wanted to avoid. For example, a large-cap fund might invest in small-cap stocks. Or a domestic fund might decide to buy international stocks. Ironically, perhaps the best example of this problem (but one that is in no way unique) is the fund you own, the Fidelity Magellan Fund. Do you recall what happened to the fund in 1996?

    Brenda: I do remember it wasn’t exactly a great year. In fact, I think the manager was fired due to poor performance.

    Erica: Your memory is good. Let me explain what happened and why it’s so crucial to learn from that experience. Over the years many investors have placed the equity portion of their portfolio in Fidelity Magellan. Unfortunately, in February 1996, Magellan’s asset allocation was only 70 percent in equities, 20 percent in bonds and 10 percent in short-term marketable securities (data from Portfolio Visualizer).

    Magellan’s investment manager at the time, the highly regarded Jeffrey Vinik, was obviously making a big bet — with your money — that long-term bonds and short-term marketable securities would outperform stocks.

    To illustrate why that’s a problem, I’m going to create an example demonstrating how Vinik’s decision impacted your investment strategy. Let’s assume that at that time your portfolio had a total value of $100,000 and your plan was to have an 80 percent equity/20 percent fixed-income allocation. You would have had $80,000 invested in Fidelity Magellan. However, as this table I’m creating shows, due to Vinik’s strategy, you actually would have had only $56,000 ($80,000 x 70 percent) invested in equities.

    Unbeknownst to you, your allocation was subjected to what is called “style drift” — your 56 percent exposure to the equity markets was less than the desired 80 percent. By placing funds with an active manager, you allowed someone else to modify your strategy.

    It’s essential to note that, for me, the key issue wasn’t the outcome of Vinik’s decision. Instead, it was your having lost control of the asset allocation process, which means you lost control of the risk and expected return of the portfolio. You may not remember, but the market subsequently soared to new highs. To make matters worse, the bonds Magellan had bought fell in value. And as you correctly recalled, the fund manager moved on, as they say, “to pursue other career alternatives”.

    This was such a compelling story that it led Peter Bernstein, in his wonderful book Against the Gods: The Remarkable Story of Risk, to analyse the composition of the Fidelity Magellan Fund. For the period February 1985 to June 1995, he noted that its composition “varied over time to such a degree that it would have been virtually impossible for investors to determine the asset classes in which they were investing, or the risks to which they were being exposed.”

    The Fidelity Magellan example is by no means a unique one. There is really only one way for you to avoid this type of risk and the damage it can cause. You must use only passively managed funds. However, even this is only a necessary condition for successful buy-and-hold investing. The sufficient condition is to rebalance the portfolio on a regular basis. Since asset classes change in price by varying percentages, it’s necessary to rebalance the portfolio on a regular basis to restore it to its desired asset allocation. Otherwise, the market will cause the same type of style drift that active managers cause.

    Brenda: That was a helpful explanation. Thanks again for inviting me. I have a lot to think about.

     

    The moral of the tale

    There is only one effective way to implement a passive, buy-and-hold investment strategy — both the investor and the vehicles in which they invest must be passive. And even that is not sufficient. The investor must periodically rebalance the portfolio to avoid allowing the markets to cause it to style drift (alter their asset allocation).   

     

    Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.  While reasonable care has been taken to ensure that the information contained herein is factually correct, there are no representations or guarantees as its accuracy or completeness. No strategy assures success or protects against loss. The story about Cathy, Brenda and Erica is hypothetical and should not be interpreted as representative of any individuals actual experience.

     

    LARRY SWEDROE is Chief Research Officer at Buckingham Strategic Wealth and the author of numerous books on investing.
    Want to read more of Larry’s insights? Here are his most recent articles published on TEBI:

    For every buyer there must be a seller

    Cost a huge factor in endowment performance

    Even a crystal ball won’t help

    A higher intelligence

    Unique insight or common knowledge?

    What investors can learn from Moneyball

     

    PREVIOUSLY ON TEBI
    Here are some other recent posts you may have missed:

    The only way to be a buy-and-hold investor

    Why active will continue to underperform

    Why cap-weighting dominates

    Five ways to boost your financial resilience

    The patience of a saint

    For every buyer there must be a seller

     

    FIND AN ADVISER

    Investors are far more likely to achieve their goals if they use a financial adviser. But really good advisers with an evidence-based investment philosophy are sadly in the minority.

    If you would like us to put you in touch with one in your area, just click here and send us your email address, and we’ll see if we can help.

     

    © The Evidence-Based Investor MMXX

     

     

     

  3. Sport, investing and the paradox of skill

    Comments Off on Sport, investing and the paradox of skill

     

    By LARRY SWEDROE

     

    Despite volumes of research attesting to the meaninglessness of past returns, most investors (and personal-finance magazines) seek tomorrow’s winners among yesterday’s. Forget it. The truth is, much as you may wish you could know which funds will be hot, you can’t — and neither can the legions of advisers and publications that claim they can.

                                                                                                       —Fortune, March 15, 1999                                                              

     

    Barry Bonds was arguably the best baseball player of his era. No one would consider him to have been lucky to generate the statistics he produced because they are persistently so much better than those of other players.

    What is important to understand is that his superior results were probably the result of small differences in skills.

    Bonds was perhaps a bit stronger than most players (though some are stronger). His bat speed was probably slightly faster (though there are others whose bat speed might be just as fast or faster). His hand/eye coordination was also probably slightly superior (again, a few probably have similar skills). He was also one of the fastest runners in the game (though he was not that much faster than most, and others had superior speed).

    The small differences in each of these categories (and perhaps others) is what allowed him to be perhaps the best player of his era.

     

    An athlete’s competition is other individual athletes

    What is important to understand is that Bonds’ competition is other individual players. In terms of individual skills, he was not stronger than every player. Nor was he faster than every player, and so on. The world of investing, however, presents a very different situation. The difference in the form of competition is why we do not see persistence of outperformance of investment managers. To understand this, we need to understand how securities markets set prices.

    Dr Mark Rubinstein, professor of applied investment analysis at the Haas School of Business at the University of California at Berkeley, provided the following insight:

     

    Each investor, using the market to serve his or her own self-interest, unwittingly makes prices reflect that investor’s information and analysis. It is as if the market were a huge, relatively low-cost, continuous polling mechanism that records the updated votes of millions of investors in continuously changing current prices. In light of this mechanism, for a single investor (in the absence of inside information) to believe that prices are significantly in error is almost always folly. Public information should already be embedded in prices.1

     

    Rubinstein was making the point that the competition for an investment manager is not other individual investment managers. Instead, it is the collective wisdom of the market — economist Adam Smith’s famous “invisible hand”. It’s the same collective wisdom that prevents knowledgeable sports fans from exploiting the lack of knowledge of the casual fan when betting on sporting events. The competition was the market, not the skills of each individual participant.

     

    Active managers compete against the entire market

    The implication for investors, as author Ron Ross points out in The Unbeatable Market, is that: “The quest for market-beating strategy boils down to an information-processing contest. The entity you are competing against is the entire market and the accumulated information discovered by all the participants and reflected in prices.”2

    Here is another way to think about the quest for superior investment performance: “The potential for self-cancellation shows why the game of investing is so different from, for example, chess, in which even a seemingly small advantage can lead to consistent victories. Investors implicitly lump the market with other arenas of competition in their experience.”3

    Rex Sinquefield, former co-chairman of Dimensional Fund Advisors (DFA) who retired in 2005, put it this way: “Just because there are some investors smarter than others, that advantage will not show up. The market is too vast and too informationally efficient.”4

    While the competition for Bonds is other individual players, the competition for investment managers is the entire market. It would be as if each time Bonds stepped up to the plate, he had to face a pitcher with the collective skills of Randy Johnson (fastball), Greg Maddux (control), Roger Clemens (split-finger pitch), Carl Hubbell (screwball), Bert Blyleven (curveball) and Gaylord Perry (spitball). If that had been the case, Bonds certainly would not have produced the same results.

     

    Absolute skill versus relative skill

    In the world of investing, the competition is indeed tough. What so many people fail to comprehend is that in many forms of competition, such as chess, poker or investing, it is the relative level of skill that plays the more important role in determining outcomes, not the absolute level. What is referred to as the “paradox of skill” means that even as skill level rises, luck can become more important in determining outcomes if the level of competition also rises.

    Charles Ellis noted in a 2014 issue of the Financial Analysts Journal that “over the past 50 years, increasing numbers of highly talented young investment professionals have entered the competition. They have more-advanced training than their predecessors, better analytical tools, and faster access to more information.”

    Legendary hedge funds, such as Renaissance Technologies, SAC Capital Advisors and D.E. Shaw, hire Ph.D. scientists, mathematicians and computer scientists. MBAs from top schools, such as Chicago, Wharton and MIT, flock to investment management armed with powerful computers and massive databases.

    For example, Gerard O’Reilly, the chief executive officer of DFA, has a Ph.D. from Caltech in aeronautics and applied mathematics. Eduardo Repetto, the chief investment officer of Avantis Investors, has a Ph.D. from Caltech and worked there as a research scientist. And Andrew Berkin, the head of research at Bridgeway Capital Management, has a Caltech B.S. and University of Texas Ph.D. in physics, and is a winner of the NASA Software of the Year Award.

     

    “Unsurprising result”

    According to Ellis, the “unsurprising result” of this increase in skill is that “the increasing efficiency of modern stock markets makes it harder to match them and much harder to beat them, particularly after covering costs and fees”.

    Another problem for investors is that since today as much as 90 percent of the trading is done by institutional investors, it is difficult to think of a large enough group of likely individuals to exploit. 

    Understanding the true nature of the competition and the difficulty of achieving superior performance, Ralph Wanger, former chief investment officer of Liberty Wanger Asset Management and lead portfolio manager of the Liberty Acorn Fund concluded:

    For professional investors like myself, a sense of humour is essential for another reason. We are very aware that we are competing not only against the market averages but also against one another. It’s an intense rivalry. We are each claiming, “The stocks in my fund today will perform better than what you own in your fund.” That implies we think we can predict the future, which is the occupation of charlatans. If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you.5

     

    Active management is a negative-sum game

    There is another important difference between sports and investing that explains the lack of persistence of superior investment performance. When Bonds was at the plate, he was engaged in a zero-sum game — either he won, or the pitcher did.

    However, investment managers trying to outperform are not engaged in a zero-sum game. In their efforts to outperform the market, they incur significantly higher expenses than passive investors accepting market returns. Those costs are research expenses, other fund operating expenses, bid-offer spreads, commissions, market impact costs and taxes. It would be as if Bonds went up to the plate with a doughnut (a weight) on his bat while all other hitters had no such handicap.      

    The academic research on the subject of performance persistence is clear: There is little to no evidence of any persistent ability to outperform the market without taking on greater risk.

     

    Summary

    The conventional wisdom is that past performance is a good predictor of future performance. The reason why it is conventional wisdom is that it holds true in most endeavours, be it a sporting event or any other form of competition. The problem for investors who believe in conventional wisdom is that the nature of the competition in the investment arena is so different that conventional wisdom does not apply—what works in one paradigm does not necessarily work in another.

    Peter Bernstein, consulting editor of the Journal of Portfolio Management and author of several highly regarded investment books, including Against the Gods and Capital Ideas, put it this way: “In the real world, investors seem to have great difficulty outperforming one another in any convincing or consistent fashion. Today’s hero is often tomorrow’s blockhead.”6

     

    The moral of the tale

    To avoid choosing the wrong investment strategy, one must understand the nature of the game. In the investment arena, large institutional investors dominate trading. Thus, they are the ones setting prices. Therefore, the competition is tough.

    Making the game even more difficult is that the competition is not each individual institutional investor. Instead, it is the collective wisdom of all other participants. The competition is just too tough for any one investor to be able to persistently outperform.

     

    1. Mark Rubinstein, Rational Markets: Yes or No? The Affirmative Case, Financial Analysts Journal (May-June 2001).

    2. Ron Ross, The Unbeatable Market (Optimum Press, 2002), p. 57.

    3. Rubinstein, Rational Markets: Yes or No? The Affirmative Case.

    4. Raymond Fazzi, Going Their Own Way, Financial Advisor (March 2001).

    5. Ralph Wanger, A Zebra in Lion Country (Simon & Schuster, 1997).

    6. Peter Bernstein, Against the Gods (Wiley, 1996).

     

    LARRY SWEDROE is Chief Research Officer at Buckingham Strategic Wealth and the author of numerous books on investing.
    Want to read more of Larry’s insights? Here are his most recent articles published on TEBI:

    A strategic approach to rebalancing

    The cost of anticipating corrections

    A cautionary tale about chasing performance

    Markets are more efficient than you think

    More proof that consultants can’t pick winning funds

    Active fund performance in the COVID crisis

    Hedge fund fees are much worse than you thought

    The twenty dollar bill

     

    OUR STRATEGIC PARTNERS
    Content such as this would not be possible without the support of our strategic partners, to whom we are very grateful.
    We have three partners in the UK:
    Bloomsbury Wealth, a London-based financial planning firm;
    Sparrows Capital, which manages assets for family offices and institutions and also provides model portfolios to advice firms; and
    OpenMoney, which offers access to financial advice and low-cost portfolios  to ordinary investors.
    We also have a strategic partner in Ireland:
    PFP Financial Services, a financial planning firm  in Dublin.
    We are currently seeking strategic partnerships in North America and Australasia with firms that share our evidence-based and client-focused philosophy. If you’re interested in finding out more, do get in touch.

     

    WHAT NEXT?
    What are you going to read next? Here are some suggestions:

    Practitioners still pay too little attention to academia

    Investing shouldn’t be a gamble

    Are you still playing by the old rules?

    The names are never the same

    The best friend investors have ever heard of

    Let’s make EBI fun, Part 1

    Do you think you’re smarter than Terry Smith?

    Truth tellers versus salesmen

     

    © The Evidence-Based Investor MMXX

     

     

  4. Truth tellers versus salesmen

    Comments Off on Truth tellers versus salesmen

     

     

    Everyone has their opinions about markets and investing, and they’re entitled to them. But it’s ironic that some of the most successful and renowned investors over the decades have been those least likely to be dogmatic in expressing their views.

    Perhaps it’s the humility gained from repeatedly trying and failing to second-guess the market, but the investors really worth listening to are those who know their own limits.

     

    Selling products

    In that sense, these veteran observers of markets cut a stark contrast to the swashbuckling managers who flaunt their confidence about the likely direction of stocks and bonds as a sales strategy to encourage people to buy products they don’t need.

    If what people need is the promise of certain return, the latter group will almost certainly attempt to sell that to them, while the former group — the truth-tellers — will advise that as in life generally, there is no certainty in markets. There are only ways of mitigating risk.

     

    Risk can never be eliminated

    The great American financial historian Peter Bernstein was one of the truth-tellers, warning people that even with the most powerful computers and systems, no investing model could ever perfectly factor in every risk, or the possibility that the previously unthinkable might become reality.

    “The essence of risk management lies in maximising the areas where we have some control over the outcome while minimising the areas where we have absolutely no control…. and (where) the linkage between effect and cause is hidden from us,” Bernstein wrote.

     

    Speculation is pointless

    Warren Buffett is another of the truth-tellers. Constantly asked for his view of the economic or market outlook, the Sage of Omaha takes a deep breath and says speculation is pointless.

    “I don’t think anybody knows what the market is going to do tomorrow, next week, next month or next year,” Buffett told Berkshire Hathaway’s annual meeting in 2020 during the pandemic. “I know America is going to move forward over time, but I don’t know for sure.”

    Addressing the question of risk on another occasion, Buffett said the flipside of irresolvable uncertainty was the opportunity this presented to the long-term, disciplined investor.

    “An argument is made that there are just too many question marks about the near future. ‘Wouldn’t it be better to wait until things clear up a bit?’ Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

     

    Old-fashioned stickability

    Another champion of humility in investing is the renowned consultant Charley Ellis, who founded Greenwich Associates in the early 1970s. Ellis’ view, expressed in his best-selling  book Winning the Loser’s Game, is the futility of seeking to outguess the market.

    “The best way to achieve long-term success is not in stock picking and not in market timing and not even in changing portfolio strategy,” Ellis said.

    “Sure, these approaches all have their current heroes and war stories, but few hero investors last for long and not all the war stories are entirely true. The great pathway to long-term success comes via sound, sustained investment policy, setting the right asset mix and holding onto it.”

     

    The virtue of a good plan

    None of this is particularly sexy. It doesn’t involve the promise of overnight success and it doesn’t conjure up images of heroic figures pitching their wits against the world. It involves old-fashioned virtues such as humility, patience, discipline and keeping a level head.

    On the positive side, it also means that you don’t have to take down markets personally, just as you shouldn’t claim rising markets as vindication of your investment nous. Much as the media might suggest otherwise, investing is not a competition.

    A good plan for an individual investor is one they can live with and that allocates their assets to maximise their chances of reaching their goals in their desired timeframe. Risk is managing through diversification and attention is paid to cost and taxes. The portfolio should be periodically rebalanced as markets change and as needs and circumstances evolve.

    No plan will be perfect. It can never encompass every risk. Outlier events can always occur. But risk can be managed up to a point and there are strategies to help us deal with events that no one saw coming – like a financial crisis, a geopolitical event or a pandemic.

    These simple truths were expressed most eloquently and concisely by the great Jack Bogle, the founder of Vanguard Group and one of the pioneers of index funds.

    “The greatest enemy of a good plan is the dream of a perfect plan,” Bogle wrote. “Stick to the good plan.”

    Amen to that.

     

    Here are some recent TEBI posts you may have missed which we think you’ll find interesting:

    A cautionary tale about chasing performance

    Do the markets really care who wins the election?

    How much life insurance do you need?

    Stop playing market whack-a-mole

    You get what you don’t pay for

    A strategic approach to rebalancing

    Cut yourself some slack

    What do investors and trial juries have in common?

    Why have stocks lagged bonds since 1970?

    The cost of anticipating corrections

     

    OUR STRATEGIC PARTNERS
    Content such as this would not be possible without the support of our strategic partners, to whom we are very grateful.
    We have three partners in the UK:
    Bloomsbury Wealth, a London-based financial planning firm;
    Sparrows Capital, which manages assets for family offices and institutions and also provides model portfolios to advice firms; and
    OpenMoney, which offers access to financial advice and low-cost portfolios  to ordinary investors.
    We also have a strategic partner in Ireland:
    PFP Financial Services, a financial planning firm  in Dublin.
    We are currently seeking strategic partnerships in North America and Australasia with firms that share our evidence-based and client-focused philosophy. If you’re interested in finding out more, do get in touch.

     

    FIND AN ADVISER
    Are you looking for an evidence-based financial adviser? We can help you find one. Click here for more details.

     

    © The Evidence-Based Investor MMXX

     

     

The Evidence-Based Investor is produced by Regis Media, a specialist provider of content marketing for evidence-based advisers.

Contact Regis Media

Disclaimer: All content is for informational purposes only. We make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use. Full disclaimer.

© 2020 The Evidence-Based Investor. All rights reserved.