Personal Investing ... When To Tie Is To Win ... Then Deciding to Win Big by Skating to Where the Puck Will Be

Advice concerning personal investing is chock full of noise from the so-called experts. There's a great deal of "unhelpful" chatter directed at individuals regularly, so let's make a genuine effort to clarify and simplify the truth about long term investing success.

We'll break it down KISS style and attempt to explain why so much "expert" financial advice being spun today is not only worthless but even worse than that. It's often counterproductive.

Even more important, we'll make it clear how we can make good things happen all by ourselves DIY style, with maybe a small boost from our 'friends,' even if we're not 'market experts.'

In fact, my strongly held view is that it's always better to be a self interested sensible individual investor than to turn our savings and investment decisions over to a self interested financial money manager or stock broker. And here's why.

If we can match stock market returns over a long period of time, which we can DIY style --- aka tie the market --- we will achieve measurably better perfomance than by investing with the pros simply because we will avoid the expenses charged by those so-called pros. On this point the historical record is perfectly clear.

And if we will also refrain from "investing" heavily in commodities like real estate and gold, which really is speculating on the future price movements of those commodities, we won't be relying on a higher price to bail us out when we decide to sell those non-earning commodities. Instead we'll be putting our money to work alongside companies who are investing in the future and generating profits that will be shared with their owners, aka shareholders.

And if we don't want to settle for a tie, which is actually a win, but want to win really big, then here's how we can do that, too.

To win big over the long haul, we need to adopt legendary hockey player Wayne Gretzky's strategy of skating to where the puck will be and not where it is or once was.

For the past thirty years or so, investing in bonds and other fixed income instruments worked well. It didn't work as well as investing in stocks, but it did work well.

And from time to time, gold has been a great thing to own, as was the speculative buying and flipping of real estate and homes. And the dot com stock price bubble of the 1990s was a short term winner as well. But that's what they all were -- short term winners. Not long term winners.

Let's be long tern winners, if only by playing for the tie. That is, by taking what the market gives us and matching the stock market's returns over a long period while avoiding paying unnecessary commissions and investment fees for doing so.

In other words, let's avoid the vast majority of the costs and fees associated with "professional" money managers and stock brokers.

But winning big is absolutely doable DIY style, too. And that means making the decision to replace bonds with blue chip stocks as the "new fixed income" piece of our long term individual investment portfolio.

In Investing, No Need for Sudden Death makes the case that playing for the tie is a winning strategy for individual investors:

"Playing for a tie may go against the grain of most American sports, but it should be central in investing. That’s because a core finding of modern finance theory is that we don’t need to beat the market. In fact, for most of us, once we’ve decided how much risk we want to bear, a better approach is aiming to tie — or match — the market return.

 

That’s the message of William J. Bernstein, an investment adviser and author, most recently, of the e-book, “Skating Where the Puck Was.” Periodically, Mr. Bernstein says, some investment manager discovers a way to generate outsize returns. Whether the favored asset class is Internet shares or gold bullion or oil futures or mortgage-backed securities, the new market-beater isn’t likely to last.

 

“As soon as one gets discovered, it’s already gone,” he writes. Matching the market is the best that most of us should hope to do.

 

Much the same insight appears in new research by two finance professors, R. David McLean of the University of Alberta and the Massachusetts Institute of Technology, and Jeffrey Pontiff of Boston College. . . . In their paper, they found that as soon as these methods were published, their efficacy began to decay, probably because other investors soon copied them. The paper, available online, is titled “Does Academic Research Destroy Stock Return Predictability?”. . . .

 

And Professor Pontiff added, “I tell my own students that the core of their own personal investments probably ought to be a low-cost index fund that mirrors the market.”

 

IN his e-book, Mr. Bernstein acknowledges that some talented people do manage to beat the market, at least for a while. Some move ahead of the pack by discerning opportunities on a new financial frontier. But such vision is rare and such opportunities are fleeting. “It does happen, and people try to copy them, and that’s the problem,” he said in an interview. . . . 

 

“As a dismal but useful rule, most good investment ideas eventually get run into the ground,” he writes. . . . Over the three- and five-year periods that ended in mid-2011, he says, a simple balanced index fund portfolio, 60 percent in stocks and 40 percent in bonds, beat the average university endowment. And putting money in the balanced index fund requires no skill and minimal fees.

 

The alternative approach — trying to duplicate the experience of a pioneer — is where Mr. Bernstein’s book title comes in. Copying exceptional strategies is like “skating where the puck was,” he says. As Wayne Gretzky, the hockey great, was taught by his father back when the N.H.L. still had ties, it’s better to skate where the puck will be.

 

That’s hard to do, though, and very risky. Mr. Bernstein, a retired neurologist based in Portland, Ore., says it’s better to play for a tie by assessing how much risk you are able to bear, allocating the assets in your portfolio carefully and using low-cost index funds to match the market’s returns.

 

That’s why the metaphor for this approach may come from soccer, after all: sometimes the smartest strategy is just playing for a tie."

 

Summing Up

 

Playing for the tie makes sense.

 

But for long term players today, there's a better opportunity by shifting to an all stock porfolio.

 

Accordingly, people should think carefully about replacing bonds with blue chip dividend paying stocks or a low cost S&P 500 Equity Index fund from Vanguard or Fidelity, as examples.

 

In my opinon, that's going to be the winning strategy for at least the next several years.

 

And even better than that, it's likely to be a winner for the next few decades as well.

 

Gretzky was right about skating to where the puck will be and not to where it is or once was. And with today's interest rates, the puck WILL BE where dividend paying stocks are and not with bonds.

 

Avoiding the payment of unnecessary costs for "expert" advice and owning blue chip dividend paying stocks for the long haul are winning ways to play the game of personal investing.

 

At least that's the way I play the game.

 

Thanks. Bob.