Beating the Show-Offs
- Joshua M Brown
- October 14th, 2012
If you've ever met me in person, you might notice that I have a slightly crooked nose, there's an ever so gentle slope toward one side of my face - you really have to be looking for it I guess. It's a bit beyond just a deviated septum, but it causes me to snore and breathe through my mouth most of the time. I've lived with it since I was five.
What happened? I was playing pirates with my friends on a big wooden sailing ship playground at Point Lookout Beach on Long Island. I was jumping back and forth across the beams high up in a day and age before they started rubberizing the ground below. One daring move too many and I fell face-first 20 feet to the concrete.
The consequences are with me forever but so is the lesson: Don't be a show-off.
I talk to a lot of potential investors about their portfolios and about some of the ways in which our managed assets might be of service to them. I'm not in the Greatest Trade Ever biz and you'll never see VRNG or PCLN in one of our models. Upon explaining our approach, I'll sometimes hear "That's it?" I suppose there's an assumption that because I'm on TV and stuff that I must manage money like a wannabe hedge fund manager or an aggressive trader.
(not my desk)
In reality, I run retirement assets in such a way that my wealthy clients will be able to make it through to the end without compromising on their quality of life. This requires discipline, of the behavioral and emotional sort, way more than it requires any kind of overly acrobatic equity disco.
A portfolio compounding at 7 percent will double in 10.5 years. Thus, if a client has 20 years of working, saving and investing in front of him (and our nemesis inflation compounds at just 2 to 4% a year) the reality is that we'll be just fine (even if a bit envious at times of an Icarus trader's good fortune and a bit smug when they inevitably crash back to earth). Dicking around with small cap Chinese coal miners just because "they move, bro" simply doesn't enter into this goal-oriented approach. And once the goals become simple, the methodology ought to be every bit as simple. I tell people that if I ever start talking about delta hedging I'm probably high on something and they should fire me.
Erik Falkenstein, a quant and blogger with a phenomenal body of work on low volatility investing, is out with a book on the topic. It's in my queue, but I wanted to share a really great post of his on this very topic:
It's interesting to note that in games there's a profound dichotomy between the optimal tactics for beginners and experts. For example, Simon Ramo notes that among the very best tennis players, to win you need good winning shots; to be a good average player, you need to merely lower your failure rate. In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: beginners should focus on avoiding mistakes, experts on making great moves.
Yet if the distinguishing characteristic of an expert investor is whether they are being aggressive, then any aspiring expert is forced to be aggressive because this signals to others that he truly is an expert, and finance is all about getting other people to give you money to manage. Thus it should come as no surprise that if you give people advise to invest is simple index funds or to focus on low volatility stocks because you can do little damage, and save a couple percent a year, far too many will dismiss this advice. The favorites of aspiring financial moguls are volatile, because one isn't going to hit a 'ten-bagger' on Coca-Cola (vol of 15%), but rather Netflix (vol of 70%).
As a rookie, I thought I was supposed to be living (but more often dying) by the gun and playing in the hottest stocks I could find. But absent the tools and experience of a true professional short-term trader, I was essentially jumping around along the peaks of a big wooden playground, smashing my nose from time to time when gravity and probability asserted themselves. And after each successive spill, I'd simply hoist myself back up the latticework with a faint promise to myself that this time the results would be different.
They never were.
Aspiring Big Shots take note: Learning not to fall (or not to fall too far or too often) is of much greater benefit than learning to dance and prance atop the rigging. On a real ship, you'll never see the captain doing that stuff.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.