Seven Lessons for Investment Failure

Seven Lessons for Investment Failure

November 22, 2022

As I was searching through the investment/behavioral finance section of my Kindle for a book to download over the holidays, I noticed there was no shortage of “expert” advice on investing and how to get rich.  Strangely enough, they all seemed to have the same trend: The Ten Best Funds for Today, the 5 Lessons A Millionaire Taught Me, The Five Rules for Success, The 9 Steps to Financial Freedom…blah, blah, blah (In full disclosure – my book “Unpack Your Financial Baggage,” does not claim any of the above).

It dawned on me what legendary investor, Charlie Munger of Berkshire Hathaway, explained in how he decided his commencement speech to the graduating class of Harvard on June 13, 1986. Mr. Munger explained:

I will tell you how my consideration of speech length created the subject matter of the speech itself. I was puffed up when invited to speak. While not having significant public-speaking experience, I do hold a black belt in chutzpah, and I immediately considered Demosthenes and Cicero as role models and anticipated trying to earn a compliment like Cicero gave when asked which was his favorite among the orations of Demosthenes. Cicero replied: “The longest one.”

However, fortunately for this audience, I also thought of Samuel Johnson’s famous comment when he addressed Milton’s poem, Paradise Lost, and correctly said: “No one ever wished it longer.” And that made me consider which of all the twenty Harvard School graduation speeches I had heard that I wished longer. There was only one such speech, that given by Johnny Carson, specifying Carson’s prescriptions for guaranteed misery in life.

He continued that Carson couldn’t tell the previous graduating class how to be happy but could tell them from personal experience how to guarantee misery.  Munger explained, “…how to create X by turning the question backward, that is, by studying how to create non-X.”  The great algebraist, Jacobi, had the same approach - many hard problems are best solved only when they are addressed backwards. “Invert, always invert,” said the great mathematician.” Hence, my Seven Lessons for Investment Failure.


Lesson One: Allow Your Emotions to Dictate your Decisions 

Although many could manage their investment Portfolios/Financial Planning on an intellectual basis, they continue to battle one primary issue - separating their emotions from investment decisions. We call this Human Nature. For example, a study done by an independent research firm, Dalbar, has found the following: From 1992 to 2021, a thirty-year period, the average stock fund investor returned 7 percent per year. Yet the market has returned 10 percent per year1.

So, lesson one for failure is to continue to allow your emotions to dictate your investment decisions.

Lesson Two: Believe ‘This time is different’

Sir John Templeton once said, the four most dangerous words in investing are, “This time is different.” Arguably, since the beginning of time – every new event is slightly different.  The one constant in life is - things change.  The next crisis – always seems as if it is different.  However, we have somehow managed to keep moving forward and – historically speaking – prospered economically.  Harry Truman once said that the only thing new in the world is the history you don’t know. 

Lesson two for ongoing investment failure is continue believing that this time is different by reacting to today’s crisis as the next end-of-the-world-as-we-know-it. 

Lesson Three: Believe what you read

The investment media has been somewhat questionable on their accuracy; from Newsweek’s August 1979 cover of “The Death of Equities,” The Economist March, 1999 Cover of “Drowning in Oil,” Business Week’s July 29, 2002 cover of “The Angry Bear,” to a popular cable host commenting in March, 2009 (the bottom of the market) to “Get out of Equities and Buy Long Term Treasuries…it could be six years before stocks come back.” 

So, lesson three of investment failure teaches us to continue to listen to media as a source for long-term investment advice.

Lesson Four: Focus on the ‘important but unknowable’

The Markets, Interest Rates, The Economy, Oil Prices, World Crises, Real Estate, and Corporate Earnings are all important figures that need to be understood in the short run.  Although they are unknowable from even the most “perceived” experts.  As an example, a study was done by The Wall Street Journal’s Survey of Economist from December 1982 through December 20212.  It asked the average economist to predict which direction interest rates would go in the next six months and then compared it to the actual direction.  The result was that sixty-two percent (62%) of the time they were wrong from 1982 to 2021. 

So, lesson four is to continue to focus on what is important in the short run, as it seems to solidify our long run investment underperformance.

Lesson Five: Stick with the herd

Tulip Bulbs in the 1600’s in Holland, which at their peak sold for around $110,000 in today’s dollars, the “Nifty Fifty Stocks,” the Dot com stocks in the late 90’s, and Real Estate bubble in the early 2000’s were all areas where the herd flocked to place monies - as it became popular to do so.  Then those bubbles burst. 

Lesson five would be to continue moving monies into the next hot asset class of the day, which in doing so, may bring those herd like returns of the past.

Lesson Six: Wait for a better time to invest

As the equity markets historically have provided volatile times, pulling investment dollars out during these times has provided investors a feeling of comfort to sit on the sidelines - until a better time or signal appears.  What is most interesting in this theory - the investor not only has to be correct in timing the market on the downside (when to sell before the bottom) but also when to get back in (before the upswing).  According to Thompson Financial and Lipper, the Dow Jones Industrial Average has generated the following positive returns from 1929-20213:

            One Year Holding Period - around 73 percent of the time

            Ten Year Holding Period - around 94 percent of the time

Lesson six tells us to continue to wait for a better time to invest, and it can allow those potential returns to be given away and never to return for your long-term retirement. 

Lesson Seven: Investing for Retirement, not Life Expectancy

The average investor has viewed investing, and in turn where to place those investment dollars, based on their timeframe to retirement, although the average life expectancy of a couple that retires at age 62 could last another 30 years (if they don’t smoke*).  As a result, those assets are placed too heavily in cash and fixed income, with the rising cost of living over said 30 years destroying their purchasing power.

Lesson seven would be to continue believing your investments don’t need to last past retirement and keep up with the cost of living.  This may allow theory to become reality.

By following the seven lessons, one would have a high probability of achieving a life of financial misery (as suggested by Johnny Carson) and having the added benefit of increasing one’s ability to not only have their money run out before them - but live a life of destitution.

*Source: On Success - Charles T. Munger reprint with permission by Davis Distributions, LLC

*Source: Based on Industry Life Insurance Tables.

1 - Important Disclosures

Data Sources: Investment Company Institute, Standard & Poor’s, BloombergBarclays Capital Index Products, and the Bureau of Labor Statistics

DALBAR QAIB Report 2022 - Average investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for each period.

The equity market is represented by the Standard & Poor’s 500, an unmanaged index of common stock. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Past performance cannot guarantee future results.

2 - Source: Legg Mason and The Wall Street Journal Survey of Economist.  This is a semi-annual survey by the Wall Street Journal last updated December 2021. Benchmark changed from 30 year Treasury to 10 year Treasury.

3 - Source: Davis Advisors. Performance obtained from a combination of sources, including but not limited to Thompson Financial, Lipper and Index websites.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
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