Fixed indexed life insurance & annuities, catastrophe bonds, viatical settlements, crypto, and other types of financial “innovation” should be avoided by most investors. If you’ve been playing poker for a half an hour and you still haven’t figured out who the patsy is, you’re probably the patsy.” Unfortunately, the financial industry is chock-full of players eager to induce you to play the financial game on their terms, always with a hefty entry fee attached.
Risk, according to Warren Buffett, is the chance you suffer a permanent loss of capital. The academic finance world has an emphasis on metrics like beta or standard deviation. Financial academics like using volatility as a proxy for risk (largely because it’s so easy to measure), but that has the perverse effect of implying that an asset becomes riskier when it drops in price—the exact opposite of how a rational buyer thinks about a lower price.
Warren Buffett compared investing to a baseball hitter waiting for a fat pitch—a nice straight ball down the heart of the plate. But unlike in baseball, in investing you’re not called out after three strikes. You can let as many pitches whiz past as you want.
Most investors allow the capricious and often irrational behavior of their fellow owners (other investors) to cause them to behave irrationally as well.
Does it really matter if Coca-Cola missed quarterly earnings estimates by 5%?
Should I sell my position in Johnson & Johnson because the stock has slid by 15% since my initial purchase?
The answer is a resounding… NO! We should probably do the opposite of whatever the market is doing (e.g. Coke falls by 10% on a disappointing earnings report caused by temporary factors – consider buying more of the stock).
It is incredibly difficult for anyone to consistently beat the market and avoid behavioral mistakes. There is no magical set of rules, a formula, or an “Easy Button” that can generate market-beating results. It doesn’t exist and never will. Beware of “gurus” selling a hands-off, rules-based system to investing. If such a system existed, the owner wouldn’t have a need to sell books or subscriptions. Mark Twain said it best when he said “It’s easier to fool people than to convince them that they have been fooled”.
Dave Conley, CFP