Remembering what is important when it comes to investing
- January 3rd, 2013
One of the great things about blogging is seeing your work linked to by others. In so doing you see how other people react to it and how they build on your thoughts that I originally set forth in the book. When you are writing about bigger picture themes like simplicity in investing and the putting into perspective the role of investing in our lives it is all the more gratifying. Over the past couple of days a couple of posts have caught my attention.
The first from Barry Ritholtz at The Big Picture lays outs ten (or so) rules to investing that hew quite closely to this idea of valuing simplicity over complexity. The important reason being that we humans just aren’t all that well-equipped to deal with the emotional tug of war that is active investing. Ritholtz writes:
I am always mindful that brilliant, complex strategies more often than not fail. Why? A simple inability of the Humans running them to stay with them whenever there are rising fear levels (typically manifested as higher volatility and occasional drawdowns).
Let me state this more simply: Any strategy that fails to recognize the psychological foibles and quirks of its users has a much higher probability of failure than one that anticipates and adjusts for that psychology.
The second post at The Zikomo Letter makes a great point about the status of most of us
investors, nee savers. The fact is that we aren’t traditional investors in the classic sense, we are in fact savers who should be focusing on generating real, risk-adjusted returns on our savings. The problem is that:
You are not an investor. You are, perhaps, an over-leveraged trader with unacknowledged cognitive biases and poor risk management.
That is okay however. There is much more to life than investing. The point being that we can generate “returns” much more easily on other important aspects of our lives than we ever can in the financial markets. There is a reason that professional money managers have a difficult time adding value over and above the fees they charge. The challenge for many is making this shift towards a more holistic view of their lives, finances included. TZL notes a simple nomenclature change can help:
You are not an investor, you are a saver. And that is good, because you are not very well positioned to be a successful investor, but you are well positioned to be a great saver.
Hopefully the conclusion of the book ties it all up:
A humble approach to the markets is an essential step in bringing our investing lives into balance, because for most of us investing isn’t really what matters. Our investments are there to serve our goals, not the other way around. What matters are the opportunities that those investments ultimately provide us to live richer, more fulfilling lives.
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- Monday links: CEO time horizons
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- Top clicks this week on Abnormal Returns
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- Podcast Friday: pitching a billionaire
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- Hedge fund picking is hard
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