When it comes to investing, it’s often what you don’t do that matters most. The best example of this is misbehavior.

Unfortunately, not nearly enough investors see it that way. And why should we? We’re bogged down with messages about owning the right investments for today’s environment. Which leads to forecasts and market timing. Two things we’re terrible at, by the way.

Besides, when patience and fortitude are cited as reasons behind investing success, it comes off as too easy…at first. A few decades of experience might challenge that perception.

Investing is a long-term game, that requires long-term patience at the risk of being constantly distracted from that effort. We’re tempted by headlines and market moves to act on a daily basis.

Sometimes the distractions work. We like stories and headlines offer simple explanations — that link cause with effect — for why the market did what it did that day.

It doesn’t matter if the story is wrong. Markets are too complex to pinpoint the sole reason behind a day’s action. Our simple brains prefer the stories because they present an illusion of control over the outcome and often fill in as a scapegoat for why we lost money. That’s better than the alternative. We prefer to believe that outcomes are controllable rather than being at the whim of chance. Continue Reading…

Quote for the Week

Someday I’m going to write a piece called “The Perils of Brilliance.” The times I have been most wrong are the times I thought I was most right. You asked me at the beginning about the things I’ve learned from all of this, and I have to repeat: It’s humility. I think the reason I’ve been able to survive 55 years in this business is because I developed humility, at least after 1958. It’s the only way to survive — not necessarily to be the top quartile — but survival is really the name of the game we’re playing with long-term considerations. — Peter Bernstein (source)

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Quote for the Week

As Justice Holmes pointed out, though, “Certitude is not the test of certainty.” What I believe will happen in financial markets and what ends up happening have no necessary relationship. The future is uncertain, and the returns investors earn will depend on the nexus of actions taken and how events unfold. Financial history provides just that: history. Its ability to inform how we think about the future and to affect how we position assets would be dispositive if it were not for the most important feature of capital markets: nonstationarity.

Nonstationarity refers to the degree to which the future does not resemble the past. If it were not for nonstationarity, we could just look to the past and unfailingly predict the future. The richest people would be those with the best databases. Librarians would be firing young aspirants to wealth on reality TV shows. Nonstationarity means that investment judgments are probabilistic and that even the best investment process will lead to undesirable results from time to time. Investment theorist Peter Bernstein noted that even if the expected value of the future were known with certainty, the standard deviation around that value would guarantee results that diverged from the averages, sometimes dramatically, and not always positively. — Bill Miller (source)

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Quote for the Week

Volatility matters on only two levels. First, if two portfolios have equal average returns, the portfolio with the lower volatility will earn the higher compound return. On the other hand, investors understand this phenomenon – either intellectually or intuitively – and tend to price volatile securities accordingly. The second consideration in volatility is much more important: when is the owner of the principal of the fund going to disburse that principal? A fund that is tied up in perpetuity could fluctuate all over the place without any consequences whatsoever. It is my impression that too many funds with long horizons are managed as though they were going to be disbursed in the next couple of years, largely because volatility makes people uncomfortable – which is irrelevant to the conditions on which a rational decision should rest. Fear of volatility can be costly to long-run returns and can unnecessarily constrain the freedom of managers to do their best. — Peter Bernstein (source)

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