Simple Investing for Simple Living
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Today, there is a growing trend
among many thinking people to simplify their lives and their living.
For many their lives are a headlong rush from one complexity to the
next. Even the most mundane decisions in our daily life confront us
with a dizzying barrage of meaningless options and choices. Now
honestly, does the American public really need an entire grocery store
aisle of breakfast cereals from which to choose? Are we really doing
our mothers a favor by offering them 25 or 30 different variations of
sugar glazed flakes? We're certainly not promoting state run monopolies
but the other extreme in which much of the world finds itself might well
be just as undesirable. In fact we are all for healthy product
competition but too often that's not what we get. What we get is out of
control marketing spin and hype with little or no real improvement of
the products. The result of all this is unnecessary complexity. Living
is better when our lives are simple. Many will no doubt disagree to
whom we wish you the best in your quest to manage complexity, especially
in that cereal aisle. For the rest we offer you a simple living
alternative to simplified investing.
Few would argue that today's financial products and
choices are not overwhelmingly complicated. The first question that
must be answered is, "Can investing ever be simple?" We think the
answer is "Yes"! If we hope to avoid the complexities of the financial
industry there are a few principles we investors must follow.
Concerning simple investing here are some simple principles:
- Don't be greedy. Most people loose money because they are greedy. There are myriads of ways to be greedy and none have a place here. Just don't be greedy! If you are greedy you will loose.
- Accept that economies cycle.
Economies around the world, and their related markets, all cycle through
times of boom and times of bust. If you recognize that there are these
global cycles or trends you can manage your investments to take
advantage of them. There are two important facts about economic cycles.
First, they are determined based on measurable data. Second, they are
public knowledge unlike most financial information.
- Resist the desire to understand the financial industry. If a ship is sinking you really don't need to understand WHY it's sinking. You only need to know that its trend is downward. Similarly, if the ship isn't sinking you don't benefit by understanding Archimedes' principle or the dynamics of Boyle's law. However, if you know the directional trend of the vessel it may well be to your advantage, unless of course you really don't care where you're going.
- Discipline yourself to ACT appropriately. Acting appropriately means acting in accord with the current cycle or trend. Remember that these trends are determined by mathematical formulas, not emotions. Again, having a clear understanding of the trends sets you free from the worries of the details. The important financial trends are slow to change and allow you time to move your money before you loose everything.
- Don't be greedy. Accept that no one makes every decision perfectly. The goal is to be right more than you're wrong. When people either delay or accelerate decisions and subsequent actions based on greed they are acting emotionally. These emotion-based deviations from the alternative data-based investment strategy will prove costly over time.
- Accept that economies cycle.
You have a choice to make. You can discuss and argue about the cycles
or you can accept the data. It doesn't really matter if a market is
going up or going down. What matters is that you adjust your
investments accordingly. Many folks (especially on the blogs) like to
hear themselves talk even though they aren't really saying anything
important. Use a mathematical formula to determine if a market is
trending up or trending down and ignore the opinions. This is what
governments and successful fund managers around the world do.
- Resist the desire to understand the financial
industry. No one can understand them, not
even the financial professionals. The mortgage derivative meltdown was a
direct result of the professionals not understanding what they were
buying nor the related risk. By and large the reason for the complexity
is marketing. Think of it as an aisle of financial cereals. One
financial product might have a gram more or less sugar coating it but
it's still just an over processed flake!
yourself to ACT appropriately. Buying or
selling an investment is strange. If we receive a signal to sell and we
see the daily price go up a little we will decide to wait longer before
we sell because we are greedy. (We will do the same thing when we buy
if the price drops.) We want to get every last penny we think we can
get. The problem is our mathematical formula has told us to sell but we
wait. Because the over-arching trend is downward with insignificant
upward blips we get caught by the next major drop in price. If we had
sold earlier we would have missed the big downward movement. The same
hesitation is true when the trend is moving up.