A few theories about money have parts that are always true. All theories of money have parts that are sometimes true. Distinguishing them is fruitful. Failing to notice “sometimes true” is dangerous.
Part of the problem with dealing with money is that the language that communicates about it is not our ordinary language. Accountana@ts use depreciation quite differently than a person you meet on Main Street. Analysts use risk differently. Managers understand time differently and have a clearer idea of context.
Does that matter? Probably.
If the words don’t mean what you think they mean, you will sooner or later make a mistake.
Take the idea of the market is going up. Time to buy right? Maybe not. You cannot tell that the market is going up until it does go up for a while. It is not a rocket from Cape Canaveral. It will not go up forever. If you use a physical idea of going up, with the implied forever, you will be intuitively wrong.
Maybe a V-8 engine is better. A piston within it goes both up and down. More like the market but still intuitively defective. An engine engineer could tell within a thousandth of an inch when the piston would stop going up and begin to go down. No investor and no investment manager can do that with the market. Again intuition fails.
An investor has choices.
- Learn a great deal more about businesses and buy stock in ones that are capably managed, innovative, well-financed and hard to compete against. After five years of education and a decade of experience, you could become good at it.
- Find someone who has the skills and use them to invest for you. That will cost something but the cost of professional fees is dramatically less than the cost of ignorance. Even then you will require more knowledge than most people possess in order to evaluate who is good and who has been merely lucky. After ten years, it is statistically probable that of a group of 1024 monkeys, picking stocks at random, one of them would have beat the market every year. That says nothing about year 11 even though many people would believe it should.
- Buy an index fund or possibly an ETF. This has been a reasonable choice in the past, but there is no guarantee that it will remain so. Recall that all investment theories are sometimes true.
Investing successfully is precarious but not impossible. Thoughtful, patient, objective people can succeed, with the addition of a single variable. They require someone who understands their intent and emotional characteristics. Someone who can talk them in off the ledge when things go badly and can deflate their balloon a little when things go well. As a bonus these angels could supply them insight and knowledge as they go along.
Look for such people.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.