Why is it so hard to invest successfully?
Study after study has shown that the average investor doesn’t do as well as a low-cost index fund. Since low-cost index funds are everywhere, why is this?
One reason is that we think that no one has faced what we’re facing. So don’t listen to those who have gone before. But we know that what has been done will be done again and that there is nothing new under the sun. Just because you haven’t seen a problem doesn’t mean no one has.
Take the financial crisis. While sub-prime CDOs are new, financial crises aren’t. From tulip-mania to the South Sea Bubble to Japanese real estate, the pattern is clear: something new leads to a widespread social change; leverage is used to democratize the process; more-and-more people profit from the trend; and finally prices overshoot and collapse, leading to widespread bank failures and a general credit contraction.
The aftermath is also clear: weakened banks need support but new management. Without a viable financial sector, a general economic contraction is inevitable. But if management isn’t changed, moral hazard rules as the bank are incented to play with the public’s money.
When we see our problems as common, we’re more likely to face them successfully. This requires humility. But remember: it’s the meek who will inherit the earth.
Douglas R. Tengdin, CFA
Chief Investment Officer
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