Good food isn’t enough

• abnormalreturns
• October 19th, 2009

Why do so many restaurants fail?

Is it because of the quality of the food, or something else altogether?  Given that most people get into the restaurant business because they love food it should be surprising that is simply bad food. Ezra Klein at the Washington Post links to a piece that notes an estimated 60% fail rate for restaurants in the first three years.  (Which frankly seems low.) The fact of the matter is that restaurants fail for any number of reasons, not least of which is not having a fully realized plan (and vision).

What does this have to do with investing?  Everything.

Unlike the restaurant business investors have the ability to be perfectly average with not much time or effort.  The twin concepts of index investing and simple asset allocation techniques allow an investor to broadly match the performance of the capital markets.  This “average” performance will generally outperform the majority of investors.  Frankly not many investors take advantage of this default option.

Where investors get into trouble is when they attempt to generate above normal, i.e. abnormal returns.  To achieve this requires a plan and the dedication to stick to the plan.  Running a portfolio is not all dissimilar to running a business (or restaurant).  It requires a diverse set of skills and a desire to achieve something beyond the ordinary.  By definition, not everyone can achieve this goal.

There is a well worn cliche in the trading business is that 90% of traders wash out in their attempt to become successful.  (Again likely a low estimate).  Unfortunately a desire to succeed is not enough.  That desire has be paired with a realistic plan for success, the vision to achieve it and the dedication to follow through on the plan.

For aspiring restaurateurs and investors alike the path to success is not an easy one.  You need to have more than interest in cooking (or investing) to make a go of it.  Make sure you have a realistic plan in place to before you start burning through your hard earned capital.

Update:

So do you still think you have what it takes to make it as an active trader?  Henry Blodget at The Money Game has a post up that might disabuse you of that notion.  He notes the many advantages (legal and illegal) the big players on Wall Street have.  In short,

Next time you feel like bellying up to the Wall Street poker table, therefore, ask youself again who is likely to win when you go head-to-head with firms like Galleon.

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