The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Believing in Something?

12/23/2019

The Wall Street Journal runs a small cartoon in every issue, which are usually worth a chuckle or two.  One from late 2009 still hangs in my office.  It shows a sad, forlorn financial advisor looking out his window, saying “It’s hard enough accepting that I let my clients down.  It’s even worse knowing the system I believed in . . . let EVERYONE down.”

I recently met a bright young man whose portfolio has performed quite well in the current bull market.  He had taken an investment course both as an undergraduate and as a graduate student.  Plus, he had taken some online course.  Therefore, he knew everything and explained to me that passive investments outperform active investments.  In other words, buying individual stocks is a “fool’s errand.”  When I suggested he tell that to Warren Buffet, he rolled his eyes and gave me that “silly old fool” look – you know the look!

While he didn’t know it, he had come under the influence of Dr. Eugene Fama, whose “efficient market hypothesis” provides the justification for passive or index investing.  Of course, it’s true, that passive investing outperforms active investing, except when it doesn’t.

There are other fashionable theories, all producing “truisms” for those searching for that one truth of investing.  It is also true that growth stocks outperform value stocks, except when they don’t.  It is also true that stocks eventually revert to the mean of their past behavior, except when they don’t.  And, the list of theories goes on . . .

The problem with truisms is that they develop true believers.  I don’t recall who said “please save me from the true believers,” but I have felt it many times.  The problem with true believers is that they become blind to evolving truth.  They need blind belief more than they need the truth.

Of course, even crusty old financial advisors still have some beliefs, such as “everybody is a genius in a bull market.”

My advice to the bright young investor is — Never forget:  A bear market teaches far more than any bull market.

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