Thursday, January 14, 2016

Why Investing Is So Damned Hard

Maybe GoPro isn't so hot after all
A friend of mine likes to say that, despite his love of flying, he'll never understand sky-diving. "Why would a sane person deliberately jump out of a perfectly good airplane?" The answer, of course, is maybe that no fully sane person would. Perhaps one needs to be just a bit mad to want to try something so mind-alteringly adrenalized, so breathtakingly dangerous.  

In stock markets like we've seen lately, with all the TV pundits screaming “SELL!”, doomsday bears droning on about a 75% selloff, and credible-seeming analysts telling folks to convert their 401(k)’s into cash (colossal mistake), we investors try to keep our wits about usand our portfolios intact. Chaos distracts from our long-term goals. Many peer into the gloom—notably 2016 has so far been among the worst market starts ever recorded—and actually forget what their goals were, or how they intended to achieve them. The media frenzy and the red in our portfolios generates real fear. It’s a good moment to take a breath, get a massage or a cocktail or go for a walk, and rethink. This is all just the other side of the coin on Wall Street. 

True, it’s difficult to remember how this can be normal. Market mayhem sometimes looks like Armageddon. But it happens, and we’ve seen it before. Heavy-duty market drops generally occur at least once per decade, and substantial corrections occur even more frequently. In fact, its moments like this that make it possible for stocks to be the fastest-rising asset class over time. This is why we invest in stocks. It’s part and parcel of what we signed up for. 

But then, you knew it would be difficult. Investing well is incredibly hard, and not even because we can’t remember how to do a discounted cash-flow model or what a moving average is supposed to mean and so, ultimately, we can’t decide what stocks to buy. In actuality those are just tactical decisions and are not so tough: we’ve talked about assessing businesses here before. And here

What makes profitable investing so hard is that it’s more about emotional discipline than hard skills. Anyone can learn the math of it, or what to look for. Successful individual investors must have something else. We need strict focus and considerable grit to achieve market-beating returns year after year. In fact, most fund managers are no better at it than the average Joes, even with their MBAs and years of brokerage training. According to the New York Times, only 2 out of 2862 funds routinely beat the S&P 500 index. 

Investing is hard because it means peering through the haze of past performance to see future possibility, on the distant horizon—while those around us see only the haze. 

Investing is hard because putting our money to work in the market means not making a purchase today, not satisfying that endless craving for stuff, in the hope that we’ll have the ability to work less and buy more years from now. There is no guarantee and we do it anyway. Repeatedly.

It's hard because to resist cashing out in big market drops we must filter out the noise from TV, radio, social media, and newspapers that urges us to sell, sell, sell into a sliding market (which if done repeatedly will rapidly deteriorate our investment strategy to ‘Buy high, sell low’). Interestingly, the brokers and fund managers we hire are often more impacted by that noise than the rest of usthey're saturated with it with their CNBC and Fox Business and Bloomberg terminals, and they breathe it all day long. Which is partly why so many managed portfolios have lots of churn but little return. 

Investing is hard because we must actually be greedy when others are fearful--one of Warren Buffett's most oft-quoted lines. Which is to say when all around us are panic selling, running for the hills, we're standing brave and sure, scouting for bargains to scoop up even as the stampede worsens.

If Jim Cramer's 'Mad Money' was a stock, I'd sell
And conversely it's hard because we must also be fearful when others are greedy: if the PE teacher and the electrician and the Uber driver and the grocery bagger are all talking stocks, it might well be time to trim our holdings and take a long trip, because it’s probably going to get ugly. 

Investing is hard because it means avoiding the near-term thinking and portfolio churn pushed daily on us by the financial media, even in rising markets. The same media who are paid for their time on camera or their column or their sound bite, and have to come up with something catchy to say each and every time the microphone turns to them. (The really useful advice is so dull no one would listen.)

What sane individual would want this job
It's hard because it means decoding the Wall Street jargon, a financial dialect deliberately conjured to confuse us and scare us into hiring “experts” to manage our investments—for a fee, of course. Beneath the verbiage, getting results in the market isn’t all that difficult. 

Mostly, it's hard because it means fighting the constant urge to look at our portfolios and do something, anything, when what’s best for strong positive returns is generally doing nothing at all. Investing well is boring stuff, a totally front-loaded decision making process followed by years of sitting on our hands and reading and thinking about our businesses.

But how else can we do it? Even "blue-chip" stocks these days are off-the-charts volatile, and the financial media machine uses that to frighten us and take our money. Our friends and our brokers are subject to the frenzy and want to "protect" us. The market has terrifying long drops, during which we watch our hard-won gains slashed. And never in all our schooling (even the MBAs!) do we get the emotional training for proper long-term investment strategy. 

A little bat-sh*t crazy can be a good necessary thing.

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