The first book I read on investing was written by Charles Ellis, Winning the Loser’s Game. It is a best seller described by Peter Drucker as “by far the best book on investment policy and management” and Money magazine dubbed Charlie “Wall Street’s Wisest Man.” He was on the Bloomberg podcast last week and it was simply a delight to hear his stories and wisdom.
In a nod to the tenets of the book and what I learned, below are the ideas I keep in mind on a daily basis to minimize mistakes and avoid the loser’s game.
1. Avoid Picking Stocks – There are armies of analysts at hedge funds and institutional investment managers who live on coffee and Red Bull, seeking to eke out 1-2% of excess returns against the market, year in and year out. Charlie Ellis poses the question, from which Olympic sport would you like to compete against the best athletes in the world – downhill skiing, swimming, the balance beam, or weight lifting?
The correct answer is none, because these individuals train their entire lives to compete and getting near the slopes, pool, or gym with them will be a losing proposition.
Picking stocks is doing the same thing, although it is a much easier game to get into – with a few clicks of the mouse. Now, selecting stocks may be understandable if one has a good feel for an industry or sector and allocates a small portion to self-management (as long as there is a definable & repeatable edge), but self-selecting the majority of stocks can introduce a large variance in portfolio outcomes.
Secondly, if one is picking stocks, is the benchmark appropriate? Is there a bias to small caps or certain factors (value, momentum, etc.)? If so, going beyond the S&P 500 will be appropriate to see if value is added or there is just systematic exposure to a certain factor. For example, buying dividend paying stocks might be great over time, but there are several indices that actually measure this and may be outperforming at a lower cost than a basket of names.
2. Keep Fees Low – It is an amazing time to be an individual investor and advisor. While the competition in markets is fierce, the products, technology, and tools for constructing portfolios to meet the planning needs of individuals have never been better and more accessible.
3. Stay with It – Every strategy, investment style, and asset class has its day in the sun and it
might will have a rough patch. Sticking with the strategy, style, or asset class is the first step, rebalancing and increasing the allocation after a period of underperformance is the second step. Selling a strategy, style, or asset class is appropriate for some reasons, however, poor recent performance is usually not a singularly good one. In fact, it is often a good reason for buying back up to the previous established target weight for the portfolio. Likewise, turning this rule around will help avoid chasing strategies, styles, and asset classes that recently outperformed and may be due for underperformance. Thus one is sticking to the first rule of investing – buy low, sell high.
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This material is based on public information as of the specified date, and may be stale thereafter. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates.