Investment truths

Some number of month’s back I decided to change the focus of my posts to technical analysis (TA) based ideas. Because I am not really very good at writing and technical analysis provides a more visual medium it allows me to communicate ideas in charts rather than struggle verbally. While a picture can be worth a 1000 words, I do realize that the written word can be so powerful and prophetic. This week I read an article by Josh Brown ( that I thought could be so very beneficial to every investor (including professionals) that I felt compelled to deviate from my charts.  For the sake of brevity I am not including the entire article but rather just what I consider to be the most important parts. If you would like to read the article in its entirety, it is titled 7 Truths Investors Simply Cannot Accept. Hopefully you will find these investing nuggets as important as I did.


Below are essential truths of investing that we are all aware of, but cannot accept at all times, no matter how much evidence we’ve seen.

Anyone can outperform at any time, no one can outperform all the time. 
There is no manager, strategy, hedge fund or mutual fund or method that always works. If there were, everyone would immediately adopt it and its benefits would be quickly arbitraged away. No one and nothing stays on top forever; the more time that passes, the more likely you are to see excess returns from a given style of investing dwindle. Until it becomes so out of favor that no one’s doing it anymore. That’s when you should get interested.

Persistence of performance is nearly non-existent.
In business, we like to bet on winners and go with what’s working now. On the field of play, we like to get the ball to whichever of our teammates seems to have “the hot hand.” While we are usually rewarded for this behavior in real life, we are penalized for it in the stock market. Because there is absolutely zero correlation between a managers past or recent performance and what may happen in the future. The out-performers of last year are equally like to outperform next year as they are to under-perform, statistically speaking. There’s literally zero rhyme or reason, even though emotionally we always want to bet with and be aligned with today’s champion. Are there exceptions? Sure, there are - but not many. You constantly hear about the few dozen managers who’ve beaten the odds and consistently outperformed, you hear almost nothing about the millions who’ve tried and failed. 

The crowd is always at its most wrong at the worst possible time. Over the long haul, only one thing is certain - there is no worse performing “asset class” than the average investor.  In the aggregate, investors under-perform value stocks, growth stocks, foreign stocks, bonds, real estate, the price of oil, the price of gold, and even the inflation rate itself. Nothing under-performs the investor class. We know this from studying dollar-weighted returns, a glimpse into not just how an investment performs but in how much actual money had been gained or lost by the people who invested in it. On the whole, we bet big on assets that have already gone up a lot and sell out after they’ve gone down. We allocate heavily toward star managers just as their performance is about to revert to the mean - and we even pay up for the privilege. This is the eternal chase and it is as old as the hills.

Fear is significantly more powerful than greed. Behavioral science has proven that we feel anguish over losses much more acutely than we feel joy over gains. As the surviving scions of a hundred thousand years of human evolution, we can literally point to this risk aversion as the primary reason our ancestors managed to pass on their DNA while so many others did not. As the descendants of the more cautious members of the species, therefore, we are genetically hardwired to act quickly when we feel threatened - and this extends itself to our most precious modern resource, our money.  That’s why markets drop much more quickly than they rise.

There is no pleasure without the potential for pain. Adjusted for inflation and taxes, the average annual return for stocks going back to 1926 is approximately four times greater than the return for ultra-safe bonds. Why? Because by investing in stocks, you are assuming more short-term risk and accepting greater volatility today. As a result, you are being rewarded in the future. It cannot ever be otherwise, this relationship between short-term risk and long-term gain is both elemental and incontrovertible.  Wall Street makes the majority of its money by convincing its customers that this rule can be skirted, manipulated or defeated. People will pay anyone nearly any amount of money who promises them all of the ups with none of the downs. Despite the fact that, in the fullness of time, this cannot possibly be achieved.