I have a great question from a valued reader. It hits a theme that I am hearing from many new clients.
Despite many hours of work, I am trailing the market.
This is a great topic and a good time for me to revisit some old articles. There is a basic principle involved. It is surprising and very different from our personal experience. In most things, the more we learn the better we do. This is not true for investment research!
The basic answer has three parts:
- Your emotions get in the way. You are human, and we are hard-wired to react to risk. Much of the advantage of the top-flight managers is steely nerve in the Warren Buffett tradition. It is easy to say that you should buy when others are needy and sell when they are greedy. When the time comes, most individual investors cave in. They sell bottoms, and buy tops.
- You are reading the wrong material, not understanding the natural bias of bloggers, TV, and the sites formerly prized for journalism. Consider the phrase "Man bites dog" for a minute or so and let your intelligence tell you why you are being misled. Learn to look for facts and data. Learn to discover when you are always getting the worst case - or the best.
- Understand that you are not alone. Most of the hot-shot pundits you read about or see on TV have similar results. You do not hear about some of the losers since they are gone. Others are featured with "Street Cred" showing that they keep getting hired somewhere. Understand that most of the hot shots you see have not done any better than you, but they have good PR departments!
A Simple Test
This excellent question deserves more analysis, and I will continue to work on the subject. Meanwhile, I suggest a simple test.
One of the most important questions for the US market is the European debt crisis. There is a very simplistic approach (followed by nearly everyone) that adds up everything that is a debt in Europe, ignores assets, and compares it to what Germany might step in to provide. Not surprisingly, this approach is rather pessimistic about the fate of the world.
Those pushing that thesis (often also selling gold, structured products, speeches, conferences, or other fear-sustained business models) completely dismiss the idea that anyone outside of Europe has an interest in the outcome.
I am struggling for a nice word for this thinking, but "stupid" is the best I can do.
Many of the most popular investment blogs featured a segment with a finger-pointing lecture from Jin Liqun. This also got repeated reviews on CNBC.
The news now is a little different, and completely consistent with what I have been suggesting for nearly a year. The Chinese are not going to bail out Europe. If there is a constructive plan, they will play a big role.
Why? Self interest. Europe is their biggest export market. If there is a reasonable plan in place, they will join in. I explained this in November, and it reads very well right now.
Just see how many sites explain to you about the current visit of Xi Jinping and his openness to participating in the European solution. If your favorite site does not explain his openness toward helping a European solution, you should delete or downgrade it in your thinking.
Putting it more strongly, anyone who does not recognize an improvement in the European situation over the last six months is not tracking the best data.