There are myriad reasons investors fail, long term, to get the returns they want. Folks have a romantic notion about “beating the market.” A lofty goal—and possible, though difficult—but most investors not only fail to beat the market; they don’t match the market or come anywhere close.
You’d think with all of today’s technology and instant information, we’d have banked on all that past collective wisdom and do better at investing—overall and on average. Yet, overwhelmingly, investors don’t.
There’s no one reason, but a major reason—maybe the primary one—is our brains aren’t set up to do this stuff right. (I’ll talk about this more in future chapters.) Our brains evolved to keep us warm, dry, fed, and safe from charging beasts. That helps us in our quest to build taller, stronger, safer buildings and develop life-saving vaccines, but it does nothing in our quest to conquer capital markets. In fact, it can hurt us. Humans are intuitive creatures; markets are inherently counterintuitive.
Simply, the way our brains evolved can make us see the world completely wrong. We see heightened risk exactly when risk is actually least. (Bunks 7, 9.) We seek patterns where there are none (Bunk 10)—we want to see order in something that is inherently and beautifully chaotic. Then, despite our innate desire to assign meaning when there is none, we completely ignore obvious patterns—even mock them! (Bunks 1, 2.)
Part 1 deals with the most basic fundamental misunderstandings. These aren’t mere theoretical disagreements—these are misperceptions that can cause investors to make lasting, costly errors. For example, despite decades—centuries even—of historic evidence, investors overwhelmingly cannot get, in their bones, that stocks rise more than fall. (Bunks 1, 2, 6, 8.)
Investors are also compelled to think too short term. Humans are obsessed with near-term survival—have to be! That helped us survive the colder months and stay fed, but it makes humans think about the investing future all wrong—to their detriment. (Bunks 3, 4, 8.) And though most investors (those with long-term growth goals, i.e., almost everyone reading this book) know they should think long term—and even say so in cooler moments—all that can go out the window once volatility kicks up. (Bunks 1, 6, 7, 8.) And once you make one or a few strategy shifts driven not by rational, cool-headed, long-term goals but by greed, fear, anxiety, indigestion, insomnia, what-have-you, you can seriously erode the chances you get anything near equities’ long-term average growth. (Bunks 2, 5.)
And volatility! Drives folks crazy—because they can’t train themselves to think long term. But volatility is normal. Even the most grizzled old investor can forget: In capital markets, averages are just that—averages. Reality can be wildly extreme—and that’s normal. (Bunks 5, 7, 9.) Folks who fail to understand that may not only get unnerved and end up missing the likely superior long-term return of stocks—they can even get robbed blind! (Bunk 11.)
Ultimately, these are misperceptions that fade away if you can get, in your bones, the power of Capitalism—that human ingenuity is boundless, and that ingenuity eventually shows in future firm earnings, which goad stock prices higher over the long term. And that if you exchange the future uncertainty of likely higher returns from stocks for the nearer-term certainty of guaranteed returns—through a risk-free investment like a Treasury—finance theory and history both say you get a lower return. That’s the risk/reward trade-off. (Bunks 1, 2, 3, 4, 5, 6, etc., etc., etc., etc.)
And if you don’t believe in the power of Capitalism, that’s fine—you don’t have to—it believes in you. Still, if you think, as many perma-pessimists do, that Capitalism is broken, can’t work anymore, or is somehow morally wrong, I’m sorry for you, but also you shouldn’t be investing in stocks anyway and you probably wasted your money on this book. Many are prone to look at the current environment as I write in 2010 (or anytime, really) and fear Capitalism is unable to overcome the anti-capitalistic forces in our government and from other governments. But ultimately, Capitalism is a bigger force than any of those anti-forces. You may not believe that, but it’s true.
Investing, inherently, requires faith that Capitalism isn’t perfect in the near term but eventually gets darn close in the longer term—and is the best way (we currently know) to ensure capital flows to where it can be best used to create near-infinite future wealth. (Bunk 10.) Therefore, investing success requires grit, discipline, alligator skin, and the clearer vision you can get through debunkery. On with it!
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