Photo: nozomiiqel on flickr
If you’re an individual with some money to invest, the first thing you need to know if you want to invest intelligently is that you shouldn’t play the Losers’ Game.What’s the Losers’ Game?
The game that 99.9% of the people who talk about investing appear to be playing: Namely, following global economics and markets and investment advice and trying to make smart decisions along the way.
If you play that investment game, you’re almost certain to lose.
And the sooner you understand that, the sooner you’ll be on your way to investing intelligently.
In other words, if you want to invest intelligently, the first thing you should do is ignore 99.9% of what you hear in the financial media.
Because, if your goal is to invest intelligently, what you hear in the financial media is mostly distracting noise that will trick you into making expensive mistakes.
That doesn’t mean that the people in and on the financial media are stupid–they aren’t. It just means that almost everything they talk about is irrelevant (or worse) if your goal is to invest intelligently.
Specifically, you should ignore:
- Market news
- Market forecasts
- Economic news
- Economic forecasts
- Bull/bear debates
- Stock picks
- Stock pans
- Technical analysis
- Quantitative analysis
- Generic “advice” (buy this, sell that)
- And so on…
Even if what you hear in the financial media occasionally proves to be “right,” you should still ignore it. Because as you’ll learn the hard way if you consume enough financial media, there will be no way to tell in advance which of the many things you hear will turn out to be right. And the ones that turn out to be wrong will cost you a lot more money than you will make from the ones that turn out to be right.
So that’s the first thing you should do if you want to invest intelligently: recognise the financial media for what it is–financial media.
(And what exactly is the financial media? Play-by-play coverage of the most exciting global sport in the world.)
The second thing you need to understand if you want to invest intelligently is that if you choose to play this global sport, you will not be playing in a special Little League or low-stakes table with the folks like you who just aren’t that good at it. You will play in the same league as the best professional players in the world. And you should expect to do as well against them as you would do against the PGA Tour players at the Masters or the Green Bay Packers in the Super Bowl or the Yankees in the World Series or grand masters in chess.Because the third thing you need to understand is that the only way for you to make money trading versus investing intelligently (owning low-cost index funds) is to out-play these top professionals.
The global active trading game is like a big poker game. The “pot” the players are playing for is called “alpha”–the total amount of performance that exceeds the performance of the index. This pot, the alpha, that is won by some players, equals the amount lost by other players. To make it smart to play the trading game, therefore, you have to have a good reason for thinking that you are going to be one of the alpha “winners” instead of one of the losers.
And when you soberly assess your competition–massive global institutional investors with decades of experience and tens of billions of dollars to spend on research, traders, trading systems, information, advice, access to companies and governments, and a hundred other advantages that you’ve never even heard of–you will (or should) gradually come to the conclusion that this competition is pretty fierce and that your chances of winning that alpha pot instead of contributing to it with losses are small.
And if you don’t begin to realise that, you should at least remember the old poker adage:
If you don’t know who the sucker is at the table it’s you.
And then there’s one last thing you should understand about your global trading competitors, folks who are very glad to see you show up (because if you’re arrogant enough to think you can compete against them, you’re easy pickings):
They’re all paid to manage money.
Why is that important?
It’s important because, in most cases, it means they will personally do fine regardless of how well they manage money. As long as they don’t screw up too badly, they’ll be able to collect big money-management fees year after year from suckers like you, even if they do worse than the market index–which, over the long-term, more than 90% of them will.
You, meanwhile, won’t get paid a cent to manage your money. You’ll invest tons of your valuable time and effort in playing a game you are almost certain to lose. And, over the years, in addition to the amount you lose competing against the world’s best investors, you’ll lose a ton of money in time and opportunity that could better have been spent elsewhere.
So, then, how do you invest intelligently?
Financial advisor Carl Richards, who just wrote a book about this, explains how here.
Here are the key points:
- Invest in a diversified portfolio of low-cost index funds
- Rebalance automatically when the allocations get out of whack
That’s it. That’s how you invest intelligently.
How can it be that simple? And if that’s how you invest intelligently, why don’t you hear more about that in the financial media?
The reason you don’t hear more about it in the financial media is that it’s boring. The financial media need to make a living, too, and covering the 24/7 market game is exciting. And there are lots of people who like following the markets minute-to-minute 24 hours a day, and the financial media competes for their eyeballs and ears.
But that has nothing to do with intelligent investing.
And just because the “magic formula” of intelligent investing is simple doesn’t mean it’s easy to do. In fact, it’s very hard.
Photo: Carl Richards
The reason it’s hard is that it’s hard to understand and believe that this strategy will guarantee that you will outperform about 75% of all investors, including the professionals, over the long haul.Why will you outperform 75% of all investors using this strategy?
- Lower costs
- Fewer mistakes
By forever trying to chase the Big Prize–alpha–most investors make lots of mistakes. They buy high and sell low. They pay too much for bad investment advice. They pay big taxes. They get fearful when they should be greedy, and greedy when they should be fearful. They fall in love with assets at the exact worst time (when they’ve been going up) and fall out of love with them at the exact worst time (when they’ve crashed). They pay big fees to mutual funds, hedge funds, and other stock-pickers that may turn in some nice returns some years but then will lose all those winnings and more in other years. They “get out of the market” just when things get really scary (cheap) and get in when things seem safe (expensive). They hire and fire a series of financial advisers, incurring huge tax penalties in the process.
And so on.
When you add up all those mistakes and costs over the years, and you include the cost of taxes (which generally make losers out of even the folks who think they’ve won), the odds are extremely high that you will end up being one of those suckers who gave “alpha” to the winners.
But, for most people, it takes years and years to really understand that–and to believe it and act on it when everyone you know including bad advisors and the financial media are telling you something else.
So, yes, investing intelligently sounds simple. But it’s hard to do. And that’s why most people don’t do it.
So if you are smart and disciplined enough to do it, hats off to you. Enjoy the time and money you would have lost if you had spent your life playing the Losers’ Game.
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