Markets Are Complex, Investing Is Hard

David Merkel Aleph Blog May 5, 2011

Human nature is not changeable. If people do significantly less well managing defined contribution assets on average than a comparable index fund, then they should not be managing their own assets, much less concentrating into a small number of stocks. I don’t care what Baruch says (whoever he is), or what my friend Josh says. Markets are complex, and investing is hard, not easy.

Just as I believe that most people don’t have the capacity to run their own businesses, the same is true of investing. Both require a lot of discipline, and most people do not have a lot of discipline.

It takes time to learn how to analyze investments. I think of people taking the CFA courses/exams, and I say to myself, “”Yes, better than nothing, but we need practical experience to truly train them.”

As an aside, when I went to take CFA exam level one, a few younger people snickered at me and said, “Who’s the old guy?” (Note: I was 34 at the time; the beard probably didn’t help, and I sometimes let it grow longish back then.) I turned to them and said, “I am an actuary. I have already been through a set of ten-plus exams far more difficult than the CFA exams. I am skilled in compound interest, accounting, statistics, economics, modern portfolio theory, and mathematics to a degree that AIMR does not consider. I am battle-tested in exams more difficult than this, where we had to read far more, and wonder whether we would be tested on minutiae such that AIMR would never consider for CFA candidates. Further, I have lived under an ethics code for ten years, so I get the AIMR code. Do you get it?” After an uncomfortable silence they looked away, and I did too.

My portfolios are concentrated by industry, but diversified within industries. I have worked hard at my theories for around 18 years now, with my current strategy running for 10+ years.

It is not easy to do well in investing. First, you may not understand the basics of valuation. Second, you may not understand what factors can drive stock prices. Third, you may not understand how industries move a groups. Fourth, you may not understand how changes in the economy may affect your investments. ANd there is more.

What’s that, you say? You don’t need to know those things because you can read a chart? Okay, good. Momentum tends to work, but chart-reading after momentum may not work. Yes, things that have gone up tend to go up further, because of disbelief among investors. Here’s the test — how often have you made money buying negative momentum, or selling positive momentum? My guess is that momentum incorporates most of technical analysis, and that most of the detailed technical analysis ideas are empty. Test: show your technical analysis idea to technicians of a different flavor, and see what they say. It’s like Evolution versus Special Creation — Evolutionists trash Creationism, but they don’t agree among themselves to any significant degree. There are few, if any ideas, that all Evolutionists agree on except the negative, “Not Creation.” (I had a more offensive version using Canadians and Americans. I passed.)

I incorporate momentum into my fundamental investing. It helps to erase the problem of value investors always being early.

Most people that I have known that have ventured into individual stocks gave up because they lost money, or didn’t make much money. Skilled amateur investors are few. This is my razor: if they can’t manage owning an S&P 500 index fund, what makes us think that they can manage a more volatile portfolio of common stocks?

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[...] – Amateurs shouldn’t manage their own stocks. Discuss. [...]

[...] Merkel disagrees with me about whether people should buy stocks for themselves. (AlephBlog) [...]

In general, yes few amateurs are consistently good investors. However, few “professionals” are good for the customer’s investments. Either they profit at their clients expense or their methods are so convoluted they may as well be selling invisible clothing or their accountability is soft and worthless or …..

One counterexample to the argument is the National Assn. of Investment Clubs (AKA, Better Investing). Their 50 year track record out performs the DOW (most individual years and in total) and their methodology is a very simplified subset of your 8 rules. We have used their process with middle and high school student [real money] investment clubs. The students also outperformed the DOW. The process and software tools are a great metric for RTM growth. The process is very quick and easy to use and covers 70% of what I put into my own selection process. Too simplified? Not to start with and put in 5 or 10 years learning. I now look to augment their process, hence why your 8 rules and a couple of other things look very appealing.

That said, you are one of only 2 professionals who I trust for investment decisions. That because of your discipline, skills, track record and integrity. I get significant added value from you. I consider the management fees, money very well spent.

CAI — agree totally on your first two paragraphs. There could be a whole set of posts on the failures of professionals, who in addition, deduct fees.

[...] David Merkel, “Skilled amateur investors are few.” (Aleph Blog) [...]

[...] Make sure you never refer to David Merkel as “the old guy”. His ready response is [...]

Baruch is the chap who said: “Markets are people!”

No I’m not.

At the risk of getting the same stare you gave the hapeless CFA students, I unsurprisingly disagree.

It takes time to learn how to invest, and if you don’t start somewhere, you never will. I don’t know if as you say “most” people aren’t able to invest properly, but I do think that at least some can if they try hard and practice. And the number of those who can is much larger than the number of individuals who are currently doing it.

I think it is also something you can learn, because so much of investing skill is not innate, in my opinion, rather it really comes from an attitude, and an act of will. Discipline comes from will. The rest comes from a basic knowledge of accounting, markets and finance which anyone with a university education is capable of grasping. A lot of people without a university education are as well.

Baruch, nothing against your pseudonymity — you write good stuff, as do many other bloggers writing under a pseudonym.

I did not stare at the CFA students, the verb I used was “turned.” I didn’t write this last night, but what I said, I said with a smile. In presentations to actuarial groups I tell them that they have more than a leg up if they want to take the CFA.

But I agree with much of what you say here, enough that I will do a follow-up. Thanks for posting.

I have a pretty simple rule that I have offered to people over the years.

If you want to learn about investing, own individual stocks. Follow them through ups and downs, random fluctuations, good quarters and bad quarters. You will make money and lose money. But over time, learn what works for you, find your own discipline, and stick to it over time.

But that’s not for everyone, which is fine. Others should use funds/managers/indexes with some reasonable asset allocation methodology. You won’t learn as much but that’s fine..not everyone wants to be an investor nor is everyone suited to it.

[...] Blog Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Most People are not Better off Buying Common Stocks on their own 05 May Why Amateurs Should Invest in Common [...]

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blog advertising is good for you Disclaimer David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. 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If you want to learn about... baruch: No I’m not. At the risk of getting the same stare you gave the hapeless CFA students, I unsurprisingly... David Merkel: CAI — agree totally on your first two paragraphs. There could be a whole set of posts on the... cjbenedikt: Baruch is the chap who said: “Markets are people!” Recent Trackbacks The Aleph Blog: Why Amateurs Should Invest in Common Stocks FT Alphaville: Further further reading Abnormal Returns: Wednesday links: skilled amateurs The Reformed Broker: Hot Links: The Treasury Flip-Flop FT Alphaville: Further reading

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Copyright David Merkel (c) 2007-2011 Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business though it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. _qacct="p-37GEOW7Y76-VY";quantserve(); var sc_project=2500170; var sc_invisible=0; var sc_partition=23; var sc_security="aacd9be3"; View My Stats _uacct = "UA-1957608-1"; urchinTracker();

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Markets Are Complex, Investing Is Hard

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