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Smart Investor Laziness And The Intellectual One

In investing there is 'smart' laziness and the 'dumb' one. The 'smart' is when you know your limitations and settle for the average. You don't have enough time, skill and willingness to pursue your own investment research and you don't trust that others can. Well, this is a reasonable position to set up a passive strategic asset allocation portfolio for your needs, buy low cost index funds representing major asset classes. Think 'lazy portfolios'. In fact, staying this course in good times and bad (with due rebalancing) guarantees that you will do better than an average investor (who pays high fees, taxes, buys high and sells low, trades frequently, etc.).

The beauty and the good news in investing that you still can do better than average. Of course it takes skills, discipline, great abilities and efforts. Yes, many people tend to overestimate these, and look like and behave like those from Lake Wobegon. However, the opposite is also true. If we are all worse than average (minus expenses), who is better?

It is important to understand the advantages of small investors over big institutions. Individuals have more flexibility in exploiting market inefficiencies. 'Professionals' are often subject to career risk, herding mentality, too averse of benchmark underperformance risk. (I know, individuals are too, but way to flexible to change!). Institutions are also just big, which is clearly not an advantage at some point.

Moreover, I think it is getting easier for individuals these days to have an edge, with all information, research and tools available, really good advance in brain/psychology research. One can just build a system to protect him/herself against their worst enemies - themselves. We are getting there.

From a recent discussion:

...I don't like being dismissed as a know nothing simply because I don't hold a degree in business, and have not played the stock market for 20 years...

You don't need a degree in anything to be right. Pity that too many people in finance look down at those who just don't take anything for granted. They are saying:

  1. Buy the entire market, with all the good companies/sectors/ countries and bad, because you can't tell the difference and all of them are priced efficiently.
  2. You can't outsmart the institutions, they have all the money and talent and technology.
  3. Settle for the market return minus costs, you can't do better than that. The market is always right.
  4. Risk is the volatility and/or incremental diversification benefit/drag to the portfolio based on correlations. Don't care if something is overpriced - it is for a good reason.
  5. Investors are rational, etc., etc., blah, blah...

This is an intellectual disaster. No hope for all of us, humble mortals.

I am amazed that so many people keep pushing this down our throats. What about critical thinking? What about all the evidence of a few skillful investors making money as you speak (not because of luck only, BTW)? Were not financial crises developed with the help of this indexers' (closeted trend-followers) crowd? Have they forgot LTCM which failed on the models of those Nobel laureates? This is nothing more than complacency and 'dumb laziness'.

Do your homework, read, spend time with critical thinkers, know thyself, and you will be fine! The market ecosystem will accommodate both smart lazy investors, and the hardworking talented, big and small. It is only the dogmatists who are having a disadvantage. Lucky we, as their influence ('give up this quest for Alpha') is good for our wealth.