When I started investing back in 2011, I’ve never really asked myself what is my goal in investing. Maybe it’s because of the mechanism that people often talk about that beats inflation over time. Or maybe it was an opportunity of one’s lifetime for an escape from the reality of working in a rat race corporate environment. The herds would probably say they are in the market to earn a realistic long term return that beats inflation over time. But we’ll never know whether that’s their true intention or not.
I was reading a couple of letters written by Howard Marks about certain objectives of investing and came across one which I thought was worthwhile to ponder.
In his letter, he presented a two-by-two matrix regarding certain investor’s behavior and the possible outcomes. I have appended the table below for our easy reference.
Dan Ariely, who is a professor in psychology and economics behavior and also authored the book titled “Predictably Irrational”, commented that human’s behavior tend to be self herding and crowd herding. By self herding, it means the tendency to follow the same decisions one has made in the past. On crowd herding, he asserted that humans like to follow what the crowd is doing and if possible, should not be left to make any decisions.
Now, back to the above table, it appears that for those herds whose objective of investing is to earn an average return that beats the inflation rate over the long run should fulfil 3 out of the 4 cells of the matrix presented above. This can be done rather directly through dollar cost averaging on an index which many have in fact done the opposite and participate in stock picking instead. When we sit down and ask ourselves again reflecting our goals in investing, they have surprisingly move a scale upwards from being an average performing to outperforming the market. That’s really weird somehow. It goes the same for myself.
In one of the quotes from David Swensen, who administered the famous Yale endowment fund, he said:
“Establishing and maintaining an unconventional investment profile requires an acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom”
The idea to the above is that non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron. Non-consensus decision by itself tends to be lonely and in pursuit of achieving an above average return, one must be daring enough to look failure as an acceptance.
Failure as an acceptance
A couple of fellow bloggers have talked quite a bit in the last post about giving failure itself a chance to succeed. I really appreciate their comments because of the experiences they have gone through.
Many of us when asked, has never considered failure as an option or acceptance. The honest truth is failure isn’t anyone’s goal to begin with, but rather an inescapable potential consequence of trying to do really well but fall from it.
In investing, any attempt to achieve a superior above average results has to entail acceptance of the possibility of a failure. The matrix appended above showed exactly that. In the course of trying to be different from the herds, one has to bear the risk of being different from the other. This can apply to many things in life.
Now, consider the below symmetry scenarios which we often hear some arguments about.
1.) If you invest, you will lose money if the market declines.
If you don’t invest, you will lose money through inflation over time.
2.) Market timing will add value if it can be done correctly.
Buy and hold will produce better results if timing can’t be done right.
3.) Aggressiveness will help when the market rises but hurt when it falls.
Defensiveness will help when the market falls but hurt when it rises.
4.) Portfolio concentration will kill the portfolio in case there is a mistake.
Portfolio diversification will diminish the portfolio in case there is a success.
5.) If you employ leverage, your successes will be magnified.
If you employ leverage, your mistakes will be magnified.
Now that you’ve seen this, can you answer this affirmatively? What is your goal in investing?