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.
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.”
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.
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