Trader Trait #11: Heeding The Forecasts of Friends and “Experts”
Why take our advice anyway? After all, it’s easy to find all kinds of people with all sorts of seemingly logical opinions about the next big, allegedly inevitable boom or bust or investment technique. Some, like your friends or trading desk colleagues, may be relying on flimsy assumptions at best. Others have impressive credentials and well-reasoned analytics to back up their forecasts. Many of them offer products like hedge funds and private equity offerings, which are opaque, expensive, illiquid and possibly incompatible with your long-term goals, yet are often sold to us because they appeal to our taste for “sexy,” exclusive offerings. Even within our industry, all of the major trading firms, and the CME Group itself, offers us daily updates on market movements, with an abundance of well-respected analysts commenting on what happened, why it took place, and what we should supposedly do about it as investors.
The common denominator to this category of advice is that they all are forecasts or tactics designed to actively beat the market — i.e., achieve alpha — rather than to invest in it. Author Michael Lewis (Moneyball, The Big Short, etc.) has observed, “Our willingness to believe that we can hire some expert to tell us how to outperform markets is a big problem, with big consequences.”5
This kind of active, alpha-seeking investing is not expected to significantly contribute to your lasting wealth nor synchronize well with wealth management based on achieving your personal goals. Plus it’s usually expensive. As Buffett stated even more bluntly,
“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’ ”6
In other words, yet again, what may make sense on the trading floor or trading desk simply no longer has meaning in the foreign tongue of sound investing. As author and financial columnist Larry Swedroe says, forecasters’ crystal balls are cloudy. In his recommended read, The Quest for Alpha, Swedroe notes:7
The conventional wisdom on investing has been that the markets are inefficient, and smart people, working diligently, can, after the costs of their efforts, persistently exploit mispricings and deliver alpha. However, as Nicolas Chamfort, an 18th-century French writer best known for his wit noted: There are well-dressed foolish ideas just as there are well-dressed fools. The fact that something is conventional wisdom doesn’t make it right.
If seeking to outperform the market does not work, then what does? In forming your investment strategy following is a checklist of important discussion points to consider:
- Establish a clear definition of long-term needs, objectives and values, such as forming a new enterprise, retiring early or purchasing additional homes.
- Identify levels of risk tolerance for various assets.
- Assess expected time horizon for your investments.
- Explore expected rate-of-return objectives that complement personal financial goals based on your unique ability, willingness and need to take market risk.
- Understand the evidence-based tenets of applying low-cost globally diversified, asset class investing as the recommended strategy for long-term wealth accumulation or preservation.
- Ensure a strategic implementation plan that is aligned with individual goals and offsets risks taken within your trading activities.
- Continually monitor, tax manage and rebalance to remain within planned risk targets.
As wealth managers ourselves, clearly we feel that most of us would benefit from working on these and other tactics in team-oriented collaboration. Many others have found great benefit in working with an advisory firm, particularly those that act as fiduciaries to their clients and practice their profession in ways that add real value: establishing a set of investment management procedures for pursuing your long-term financial goals and integrating the investment plan into an overall estate, tax and risk management plan.
But, it’s important to emphasize that your investment plan should not be a handed to you “from on high.” Rather, it should represent a consultative exploration within a fiduciary relationship in which you are deeply involved. A well-designed investment plan further serves as the foundation for an entire financial picture, establishing the framework for bringing in a professional network of top providers to help with specialized financial challenges.
5 Michael Lewis, “Bright Side of a Total Financial Market Collapse,” Bloomberg.com, September 18, 2008.
6 Mary Buffett and David Clark, “The Tao of Warren Buffett,” Scribner, copyright © 2006, page 157.
7 Larry Swedroe, The Quest for Alpha: The Holy Grail for Investing, copyright © 2011. John Wiley & Sons.
