When I started this financial blog a couple years ago, I wondered if I would run out of ideas to blog about. Luckily, so far anyhow, I have had a different problem — How to choose amongst all of the ideas that pop into my head.
Thing train of thought takes me to consider what explains the relative success and failure — the investing fates if you will — of various investors. It would be foolish (and wrong) of me to make the blanket statement that smart people make poor investors. On the contrary I believe that successful investors are very smart people — John Bogle, Warren Buffett, Carlos Slim, Peter Lynch, Bill Gross.
What is interesting and occasionally baffling to me are the poor choices that I see smart people making. For whatever reason, people tend to share two things with me: personal information and personal investing information. If I had to guess why, it is for two reasons. 1) I am actually interested, fascinated in fact. 2) I am very discrete. Still this doesn’t quite explain why relative strangers tell me these things.
One thing is for sure. I listen. And on thing I have learned is that people love to tell of their investing success and are hesitant to share their investing misses. I feel privileged to hear both types of stories.
For the record there is, perhaps, no such thing as a bad (or good) investment in the present. The “goodness” or “badness” of a given investment is only truly realized when the position is closed and the gains and/or losses are counted. There are, however, in my opinion, poor portfolio decisions.
Here is my overall impression of the types of under-performing (aka bad) portfolio decisions that smart people make. Most notably rationalizations for extreme non-diversification.
1) I work in field X. I understand field X. I believe the outlook for field X is tremendous, therefore I’m going to pick my favorite stocks that participate in X. [I heard this all the time during the tech/dot-com pre-bubble and bubble]. I’m going to focus my portfolio in X…. meaning I’m going to severely underweight all other sectors.
2) I’ve followed fund manager, fund company, or my investment manager Y, and I trust and believe in them. I’m going to put most/all of my money in their hands.
3) I understand the economy, the markets, and what’s going on. I’m going to make my own decisions, and cut my losses when appropriate. I’m going to manage my own money, and I’m not going to sheepishly follow conventional wisdom (things such as time-horizon-based asset allocation and CAPM models). I’m going to bet big and win big on what I believe in.
Over the years I’ve seen that hubris and pride are subject to positive self-reinforcement. When bets pay off, bettors place bigger bets. In most cases though, luck eventually runs out and large losses are realized. This is soul searching time. Some respond by becoming hyper-conservative for a while (I will only save money in the bank and in T-Bills), some by becoming moderate for a while (I will own some stocks, but mostly bonds), and some by doubling down.
I understand these impulses. In fact I see that impulse control is a key factor in rational investing. I understand that smart people are accustomed to being correct. It is instinctual to believe that this extends to investment decisions. I’m saying, “If you believe you are orders of magnitude smarter than ‘the market’, think twice.” Or put another way, it is better to be wise than smart when it comes to investing.
To summarized, I know first hand that smart people sometimes make very dumb portfolio decisions. They believe that their personal academic and career success will translate directly to investment success. I also know that many such very smart people have been burned, to the tune of $100,000+ (if not millions) of losses directly attributable to non-diversification.
And finally, as to my personal investments, I happily say that I have been relatively steadfast in my Boglehead-like investing style. So far it has paid dividends.
If Vulcans were investors they would:
- Buy from Vanguard. (It’s the most logical choice)
- Buy no-load funds with low expense ratios.
- Do their investing homework before buying anything.
- Study historical market data (50, 100, 200+ years worth).
- Observe but detach from market sentiments.
- Invest for the long run.
- Read the fine print.
- Just say “No” to stock pushers, brokers, and middlemen.
- Do their own research.
- Make their own decisions.
- Analyze the outcome of their decisions and learn.
My goal is to be a Vulcan investor. Naturally that is not entirely possible, however, I believe I come reasonably close. I save. I read the fine print. I say “No” to investing solicitations. I do my own research. I avoid loads and seek out low fees and expense ratios. I invest for the long run.
I acknowledge my emotion. I find outlets for it to leave my investing mind cool, logical, creative, and rigorous. One outlet is the Crazy Ivan Account (CIA). Using CIA play money releases my pent up investing emotions. Another outlet is occasional gambling. Why recklessly gamble big money on the stock/bond/options/futures markets when it is relatively easy to gamble small money at the casino and get free drinks to boot? A $200 or $300 bank roll tends to last quite a while at a $5 craps table, often for several hours, if the “bad bets” (bigger house advantage) are avoided.
I say the object of gambling is to gamble… To be irrational, even superstitious, and above all to have fun. Whereas the object of investing is to maximize return and minimize risk. Fun, generally speaking, should have little to do with investing. All things equal, I believe that the best investments tend to be boring. Accounting, and tax planning are also best when boring. Enron accounting might have been exciting… but it was also disastrous. The CIA allows me to bend this rule in a limited way, allowing my non-Vulcan desire for fun and impulsive investing to be contained.
I’m not a exactly a Vulcan investor, but I try to act like one. Are you a Vulcan investor? Do you want to be? Please share your thoughts by commenting on this post. Its easy. I look forward to hearing from you.
I’ve been reading through the prospectus for some of the Vanguard tax-exempt funds. There are four that generally cover the municipal funds markets:
They all have great expense ratios of 0.2% and credit ratings (for what they’re worth) of AA or AA-. What is most interesting to me is a comparison of duration to yield. Duration, in brief, is a standardized measure of bond price sensitivity to changes in interest rates. High duration bonds (or funds) swing more to a 1% change in interest rates than lower duration bonds. When I graph the relationship I get a very straight looking line:
In essence this is the current yield curve for this family of funds. The leftmost point is the short-term tax-exempt bond fund, followed by limited-term, then intermediate term, and finally long-term.
So what was my decision? I bought into 3 of the 4, the short-term, medium-term, and long-term. They all look like great funds. I’ll keep you posted.
I plan to look into tweaking my taxable Vanguard account investments. In particular I hope to do a little research into:
Vanguard Long-Term Tax-Exempt Fund Admiral Shares(VWLUX)
Hopefully I’ll be providing an update on what I’ve learned and what changes I’ve made to my portfolio in the next few days.
Excerpt from Vanguard:
Vanguard’s Treasury money market funds are closed to new accounts as yields tumble