We have talked a lot–generally, and in the specific context of the last few months of market volatility–about the importance of an investment process that isn’t based on words like “hope” or “proprietary model” or even “I just have a good feeling about this.” This is so because we believe that markets are pretty darn efficient, and while that doesn’t always mean the price of any given stock or any basket of stocks is “right”–there’s no such thing–it does mean that markets are good at including available information of a staggering scale into the pricing of assets. That’s not to say you can’t be successful at finding new information or coming up with new ways to synthesize existing information to gain some competitive advantage in the stock market, it’s just that it’s so difficult and unsustainable that it’s generally the wrong place to start.
I brought this up back before the holidays in the context of timing the market, where we met Jesse Livermore and his $3 billion trading day (and subsequent multiple lost fortunes). In that article I talked about some of the reasons it’s so hard to time the market, but didn’t explicitly get into one of my favorite reasons, which is: any attempt to achieve market-beating returns involves not one but two sets of difficult decisions: buying and selling.
As it relates to timing the market, people generally feel they can get the sell right (getting out while they’re theoretically on top), but they often forget they must also get the “buying at the bottom” right, which is significantly harder psychologically.
But this amnesia about the buying and selling is not exclusive to amateur investors trading their 401(k)s. As Matt Levine discussed yesterday, it also plagues professional institutional investors who might do a good, even market-beating job at buying assets, but who somehow manage to do worse than random chance when it comes to selling assets. In fact, when it comes to sell decisions, they are giving up basically a full 1% annually to any blindfolded monkey throwing darts at a board full of stocks (and you don’t have to pay the monkeys).
All this to say, investing will always be hard, because our emotions and the goals we are planning for will always be involved. But investing need not be complicated. The complicated stuff ends up in the Wall Street Journal or in water cooler mythology, but there’s always a cost, and for many that cost translates into sleepless nights and goals unattained.
So, we start at the exact opposite end of the spectrum with a disciplined, efficient investment process focused on cutting costs and taxes, being broadly diversified, and trading with rules rather than emotions. It won’t pique anyone’s interest at a cocktail party, but as an evidence-based way to increase your wealth, maybe it should.