Investor Minute
Why Avoiding Stupidity is More Important than Being Smart
There are times in life when you should try to win. And times when it’s smartest to simply avoid losing.
Take tennis, for example.
Simon Ramo, a scientist and statistician, demonstrated that professional tennis players and weekend tennis players play a fundamentally different game. “In expert tennis,” he writes, “about 80 percent of the points are won; in amateur tennis, about 80 percent of the points are lost.”
In other words, the final outcome in professional tennis is nearly always the result of the actions of the winner. While in amateur tennis the outcome is nearly always determined by the actions of the loser. You win in the pros by making great shots. You win your weekend game by keeping the ball in play long enough for your opponent to make a mistake.
Financial analyst and noted author Charles Ellis famously demonstrated that investing, like amateur tennis, is a loser’s game. This doesn’t mean it’s for losers. It means that, for the best chance of coming out ahead, your best strategy is not to try to make winning moves, but instead to avoid making errors.
But wait a minute, you might say. What if I’m “really smart” when it comes to identifying potentially undervalued stocks or market sectors? As investment writer Bob Seawright observes, being smart would be helpful when trying to beat the market, if it weren’t for all the other smart people trying to do the same thing.
He writes that, “the existence of other smart people together with copycats and hangers-on greatly dilutes the value of being market-smart.”
On the other hand, bad decision-making is not diluted by numbers. In fact, as Seawright points out, the greater the number of people acting stupidly together (in investing), the greater the aggregate risk and the greater the potential for loss. (See meme stocks.)
However, many people want outsized gains in the short-term without recognizing the real risks of speculation. Investing with a widely diverse portfolio is very unlikely to give them that. That’s not what it’s designed to do. Diversity is a strategy for consistently pursing potential growth over the long-term and under all kinds of market conditions.
But, it turns out, getting exceptional gains for a short time is not nearly as effective as achieving reasonable gains for a long time.
As Berkshire Hathaway partner Charlie Munger told Wesco Shareholders, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
One of the biggest benefits of working with a trusted advisor is having them help you avoid those ill-conceived moves that can greatly hamper your progress in reaching your goal. Not only do we offer you expertise, but also the experience that comes with helping many other clients facing similar challenges. Click here to schedule a free call with us.