The only problem with this series is I just sit there going, “dammit, I wish *I* said that.” Nice to benefit from the wisdom of others.
— Corey Hoffstein (@choffstein) June 8, 2017
As you can see this week’s “blogger wisdom” series garnered some great feedback. I want to thank everyone who participated and those of you who stopped by to read their thoughts. (If I were smart I would have written down my answers ahead of time so as to not get affected by these great answers.) Without any further ado I answer my own questions. (Click on the question to read the original post.)
Question: What do you know with a high degree of confidence about investing that does not require any statistical support?
The caveat is important. In finance we rely, rightly or wrongly, heavily on statistics. When we should rely more on arithmetic. The arithmetic I have in mind has to do with fees (and taxes). Our goal as investors is to generate real, after-tax net returns conducive with our ability to take risk. Fees come right off the top. Taxes are obviously a bit more complicated. Once you understand this you begin to view the costs of active (and passive) investing in a whole new light.
Question: If we had a 1,000 years of market data what kinds of things would get validated? What things would lack support in the data?
One of the reasons I asked this question is that we are all prone to draw conclusions from what is a limited set of (modern) financial data. I discount (highly) returns from earlier periods when financial information and technology were scarce. The kind of findings that would survive an extended period of time are those that are rooted in (bad) human behavior. We would also likely see longer runs, both good and bad, in the data. In short, twenty years is not a long time in a historical sense.
Question: Ten years hence, what we will be embarrassed by that we were excited about in 2017?
This question is pretty open-ended. You could take it in any number of directions. On the pop culture front I think our obsession with superhero movies will have ended by 2027. On the investing front technology will continue to wring costs out of the system and remove human decision making in the process. Our hand-built portfolios will look at ridiculous as that giant cellphone Michael Douglas used in the movie Wall Street.
Question: If you could (magically) impart one piece of wisdom to all investors what would it be?
Every outcome you see in business, investing, sports, politics, entertainment, etc. is some combination of luck and skill. Dissecting the relative contributions of luck and skill is nearly impossible due to the ephemeral nature of luck. So the next time you see some captain of industry on the cover of Fortune of some manager on the cover of Barron’s recognize that along the way luck played a role in their success.
Question: What’s the one thing investors should do to simplify their lives?
The pursuit of alpha is expensive, time-consuming and most of all uncertain. The more decisions you have make the more likely you are to make a mistake. As an investor you don’t have to be brilliant. Just not stupid.
Thanks again to all the brilliant bloggers who took the time to contribute their insights. Seeing all their answers in one place really helps put things into perspective. Speaking of perspective
“The fact that we live at the bottom of a deep gravity well, on the surface of a gas covered planet going around a nuclear fireball 90 million miles away and think this to be normal is obviously some indication of how skewed our perspective tends to be.”
― Douglas Adams, The Salmon of Doubt: Hitchhiking the Galaxy One Last Time
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