The search for the best returns possible hasn’t changed in centuries. There’s a need to “beat the market” or your peers. It’s human nature. But how you go about doing it is the question.
In 1988 speech, Charlie Ellis explained that superior results are only gained in one of three ways:
There are three ways in which you might try to achieve superior results: one is physically difficult, one is intellectually difficult, and one is emotionally difficult.
Intellectually difficult investing is pursued by those who have a deep and profound understanding of the true nature of investing, see the future more clearly and take long-term positions that turn out to be remarkably successful. We admire them, but only in retrospect. At the time of their doing their best work, we see them as misguided. We do not want to do what they are doing because it looks so unpromising.
Most of the crowd is deeply involved in the physically difficult way of beating the market. See if you don’t recognize the physically difficult right away. They come to the office earlier; they stay later. They read a larger number of reports more rapidly. They go to more breakfast meetings and more luncheon meetings and more dinner meetings. They are on the telephone, making more calls and receiving more calls than all the rest. They carry huge briefcases home at night, determined to get ahead by reading more reports before the morrow. In every way they possibly can, they put enormous physical energy into trying to beat the market by outworking the competition. What they don’t seem to recognize is that so is almost everyone else.
Being incapable of the intellectually difficult, and reluctant about the physically difficult, I have set about the emotionally difficult approach to investing. This straightforward, untiring approach is simply to work out the long-term investment policy that’s truly right for you and your particular circumstances and is realistic given the history of the capital markets, commit to it and – here is the emotionally difficult part – hold on.
Pick any strategy and the better-behaved investor will beat the irrational one almost all the time. And the rare exception – often confused with skill – boils down to luck. Yet, behaving better is the one area nobody considers because, in our minds, we all behave just fine.
So instead of improving behavior, people focus on the hardest ways to beat the market or to beat the other guy. You can try to out work or out think the market and some of you will succeed but the simplest and most overlooked way to get superior results is to behave better than everyone else.
Investment Policy and the Competent Stranger
- Making Contrarian Investing Work – Morningstar
- The Trouble With Active Share – R. Kinnel
- The Most Popular Way of Measuring Stock Market Value is Being Misused – S. Ro
- Dumb Alpha: Trailing or Forward Earnings? – CFA Institute
- Nothing Matters More Than Perspective – M. Housel
- The Questions That Matter – T. Hanson
- Why Land and Homes Actually Tend to Be Disappointing Investments – R. Shiller
- Fama and Thaler: Are Markets Efficient? (video) – Chicago Booth Review
- Why the Cost of Living Is Poised to Plummet in the Next 20 Years – SigularityHub
- Dollar Shave Club and the Disruption of Everything – Stratechery