In investing, can a formula guarantee success?
Certainly not, but if you listen to the “experts,” mostly trained in journalism schools, you would think there is a magic formula. Diversification, dollar cost averaging, historic price-earnings ratio, and central bank policy all seem to be included.
Reality is not like that. There is no formula that works consistently and well.
In Las Vegas, if a casino manager discovers someone with a lot of money and a formula that promises gambling success, he will send a Gulfstream 550 to Hong Kong to pick him up. Why? Because gamblers with a formula tend to lose their money systematically. Las Vegas is built on tiny advantages, except slot machines, repeated hundreds of thousands of times. You cannot systematically defeat odds not in your favour.
In the stock market, or the bond market, or the commodities futures markets, there are no house odds working against you. It is the entire market that is working against you. Or maybe it is you working against you. To see that, you must understand where prices come from.
The markets are auction markets. The highest bidder sets the price. People make an intuitive assumption that the person setting the price and the person selling to them have the same general characteristics as they themselves. That is clearly flawed. I doubt you could collect five people in a room, survey their abilities, resources and aspirations for investing and find they are the same. How many millions participate in the market? How many variables are there? Hundreds. You are unique.
We should expect the market to be a little chaotic. Carl Richards is one who has a handle on the fundamental.
With all the focus on evidence based investing, let’s not forget markets are made by irrational people doing irrational things.
Irrational people doing irrational things is hardly the basis for a formula the gurus would have you adopt.
People like predictive certainty and they cannot get it in the market. At least not in the short run. They invent formulas that help manage their fears.
The one they overlook is the only one they should see. The markets are reasonably stable over long periods. It would be hard to find any 40-year return that was vastly different than the others. Low volatility.
There is a reason for long term low volatility.
The markets reflect the nature of the economy taken as a whole. If it is growing, the businesses within it will grow. If it is shackled by regulation, taxation, insufficient capital or incompetent leadership, it will grow slower and so will the businesses within it.
Investing is not like electrical engineering. There are no laws that govern what will happen when a certain input is applied across a given circuit. It is a little random.
More like quantum mechanics.
You don’t have to know where every photon is to make a laser. There are quantum tendencies and you can manipulate those to your advantage. No certainty, just probabilities.
Investing is like that too. The helpful tendency lives in the long run and that is where you should look for predictable outcomes. The short run is composed of the irrational people doing irrational things.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772