“Wise men learn from the errors of others. Average men learn from their own errors. Dumb men never learn.”
Investing is a business. Without hard work it will not yield good results. It requires determination and persistence, and a lack of persistence will yield a bad result.
There are two kinds of investors: the dumb money that clever investors profit from, and the smart money that takes advantage of the fact that 90% of investors are dumb money. Why do so many investors get sucked dry by brokers, funds with high fees, illiquid investments, etc.? Because they don’t have the time or the discipline to learn how to invest like the smart money.
There is a constant in investing and it frustrates me, because I try to educate regular, non-professional investors. People tend to panic as a crisis unfolds, and they sell near the bottom. Conversely, people buy as a trend nears its peak, because they conclude that they have missed out.
What would it take to educate these people, which are many among us? Losses for one. Second, a willingness to read historical finance, which few will do, because it doesn’t seem relevant. If you will not learn from history, you will not learn.
Financial markets have more than their share of average and dumb men. They get fleeced, and they don’t learn. That dichotomy is key to investment markets. Think about it — if you were going into a war, would you spend more to make sure you had the best armaments? I think you would. If so, why do you go virtually undefended in contention against Wall Street?
There are two ways to do this. First, go passive and index. Safe, reasonable, good. Second, do a lot of research and find managers that follow their own advice (they invest their own money in their funds), and invest with those that have a good long-term track record. They should be managers with clearly stated principles regardless of the environment.
More data does not mean things are better. For most people more data confuses them. Giving long explanations in prospectuses is a hindrance for most, not an aid. Maybe there should be a law that says, “Prospectuses can only be 1000 words long. If you can’t get the risks in that amount of words, you deserve to be sued.”
It takes two to three years for the average investor to note that a trend has changed. Is there any surprise then about “dumb money?” Would it get any better if we told them this?
If you are willing to be patient and follow long-term strategies, you will eventually become the smart money. It will only work for those willing to take a long-term view.