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A tale of two investors: one smart and one not

A tale of two investors: one smart and one not

June 25, 2015

Today we have the tale of two investors. They are different and their investment success or failure will be influenced by who they are.

Do you identify with either of these investors? Can your own investment experience be enhanced by looking at the characteristics of the smart investor?

Which individual would you like to be? Which individual will most likely succeed with their personal investing?

The “smart” investor enjoys their investment experience.  They are knowledgeable, and truth be known, part of them wished that they were providing investment advice to others.

Even if they don’t pursue a career in financial services they are happy to discuss investment success with others and are free and willing to offer advice: Particularly about their success stories.

They will tell you in full detail about past winning strategies to identify undervalued stocks and then their timing on when those attractive stocks should be purchased. In that sense, it makes them similar to professional mutual fund managers.

Professional mutual fund managers go on speaking tours to financial advisors and the main theme of many of these talks are the great stocks they have identified and the successful timing decisions on when to purchase those stocks.

On a scale of 1 to 10 this type of intelligent investor is a 10. They are knowledgeable and successful. Or so it might seem.

They possess the characteristics that many wish we had in order that we too could be successful.

The not so smart investor realizes they do not possess the skills of others and have to settle for a buy-and-hold investment strategy. They wish they had the ability to identify good stocks and know when to buy those stocks, but in reality, they do not.

They have to settle for the less glamorous approach and buying and holding investments is done only because they are not smart enough to do anything more.

Which investor is likely to be more successful? Hint, it is a trick question. Again, which investor is most successful?

Despite the illusions of grandeur, the “intelligent” investor is less successful. If you find that hard to believe welcome to the club; me too. How could this be possible?

To understand how a more knowledgeable investor could have poor investing results we have to consider the evidence. Academic research conducted over the last half a century shows that professional managers are not successful at beating the market in which they invest.

Further evidence from companies such as Standard and Poor’s, which reports professional manager investment results compared to the underlying markets in which they invest, shows the same thing. Professional managers are not successful at beating the market.

Yes, the results from academic research and analyzing investment manager performance seems contrary to what you might expect. In this case, I would ask you not to shoot the messenger.

These are not my opinions, these are facts. This is what the evidence of investing reveals.

Take that one step further and every study that I have seen in my years in the investment business has shown that individual investors have investment returns significantly below what returns have been provided by the markets they invest in.

Smart investors and professional managers concentrate on identifying undervalued stocks and deciding on the timing to purchase those stocks. This whole concept is flawed.

A 1980s survey of 100 pension funds in the United States said stock selection and market timing accounted for less than 7 percent of investment performance of large investment portfolios. Stock selection and market timing are not what makes for successful investing.

Our recommendation is simple. Invest in a well-diversified portfolio and hold those investments for a long period of time. Your goal is to capture market returns.

If you are successful at capturing market returns it is our belief your investment returns will be in the top 10 percent when compared to all other investors.