Investing is a giant topic. Companies and TV networks are devoted to covering it 24/7. It feels completely overwhelming. But as stated earlier, market efficiency is a gift because it is highly focusing.
3 ideas come into plain view:
- Most investing effort is wasted effort
- Your human capital is a better investment
- Stick to a low overhead strategy
Investor Dean Williams delivered a keynote in 1981 entitled Trying Too Hard. He has strong opinions on the limits of our efforts in such a noisy domain.
“We probably are trying too hard at what we do. More than that, no matter how hard we try, we may not be as important to the results as we’d like to think we are.”
His stance is easily supported. Here's Williams on the futility of predictions:
“One of the most consuming uses of our time, in fact, has been accumulating information to help us make forecasts of all those things we think we have to predict. Where’s the evidence that it works? I’ve been looking for it. Really."
Unfortunately, the situation is even worse. Our sunk efforts commit us to the idea that they are worthwhile. Highly self-defeating. Consider what our efforts do to our confidence.
“Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same. And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise. And may even be worse.”
He is not making this up. Princeton Review founder, Adam Robinson, recounts a study of how horse bettors’ signals were diluted by additional data while simultaneously boosting their confidence. A devilish combo.
- The horse handicapper study
The accuracy of their predictions did not improve from the original 5 variables they selected from a large menu of data. As they were given more variables there confidence went up (confirmation bias effect) although their accuracy did not! In addition, the handicappers with only 5 variables were well-calibrated. They were close to 2x better than chance at predicting winner 20% vs 10% and they estimated their confidence as such. When they were given more variables their accuracy remained 20% but confidence grew to 30%!
The domain of investing has a weak link between effort and results.
- Human capital is your greatest asset.
- Both of them save $500/month and invest it in the market for a decade.
- Investor A compounds at 8.3% per year.
- Investor B compounds at 0%. A lost decade.
To highlight this point, investor Adam Collins creates an example of two 30-year old investors:
Obviously, Investor A ends with more money.
Q: How much would Investor B need to boost monthly savings to keep up with A?
A: He would need to boost savings from $500 to $1500 a month. This is difficult but it is a sure way to increase wealth. The best risk-adjusted return.
The solution to a lost decade for a young investor lies outside of their portfolio. Learning a new skill is a more powerful financial lever than tinkering with your portfolio to boost returns.
Saving more is more important than investing for growing wealth. Invest in increasing your top line. Invest in yourself.
- The opportunity cost of investing efforts
Meb Faber constructs an exercise where he pretends that increasing your time spent on investing translates to better returns. By doing this you can back out an implied hourly rate for your efforts.
The Cost Of Your Personal AlphaQuest (Link)
The conclusions are obvious. The more assets you have the better the effort scales. If you have $50,000 to invest improving your returns by 2% is only worth $1,000. But if you have $50 million then 2% is $1,000,000.
Only once you achieve family office levels of wealth does it make sense to be spending ANY time on your portfolio…The best way to add yield to a portfolio is to ignore it!
- My excerpts from Dean Williams' Trying Too Hard (Link)
- Movement Capital's The Risk Of A Lost Decade For Stocks (Link)
- Nick Maggiulli's Why You Shouldn't Pick Individual Stocks (Link)
- Lawrence Yeo’s Speculation: A Game You Can’t Win (Link)
- Agustin Lebron’s Rule Of Trading: You Are Never Happy With The Size You Traded. Trading is regret generator. (The Laws Of Trading Book)