One of my favorite musicians is Bob Seger. I saw him perform live while in college and he left a lasting impression. The first time I heard the song “Against the Wind” I was living in Seger’s hometown of Detroit, and the song only elevated his status. I think it is brilliant; containing one of the most poetic and philosophical lines of any song: “Wish I didn’t know now what I didn’t know then.” As soon as I heard it, I knew it would be part of my permanent collection of things to ponder. While he wrote it as mid-thirties musician reflecting on his teenage years, it is applicable at any age looking backwards.
One of the best investors I ever met was a former broker at Legg Mason. I estimate that he amassed a personal fortune in excess of 50 million dollars before he died. I’ll call him Tom for purposes of this tale. By the time I met Tom he was in his 70s and had been a broker for over 40 years. He taught me a lot. His investment approach at the time was so simple he could explain it in minutes. He had a list of 20 stocks that were his total universe of potential stocks that he could buy for his clients and he had developed a way to identify which were the best to own at any given time. He compiled the list himself. He called these 20 stocks Rip Van Winkle Stocks because as he liked to tell the story, Rip Van Winkle fell asleep for 20 years and when he woke up the world had changed. Tom felt that he should only invest in companies for his clients that they could hold for 20 years and so he focused the list down to the 20 that he felt would exist 20 years from now.
A question that always comes up, regardless of age, is how do I allocate my money once I start a savings program? The question soon morphs into how do I allocate my money after I have been saving for some time? I believe in simplicity. The combination of simplicity with mathematical elegance leads to a powerful solution that is within the grasp of most investors and most importantly, because it is comprehensible has a high likelihood of sustainability. This simply means that if you design a savings plan that is too complex, I doubt it will work. You can read A Rebalancing Tale for an example of a simple elegant solution. So when asked, how to allocate money at the start of a savings plan I always answer, the same way you would allocate money towards the middle or the end of a savings plan. This implies that selecting the initial allocation must be very important. It isn’t. As we learned in A Tale of Perspective, initially the most important thing is to start a savings program, regardless of how you allocate the money. However, your allocation takes on importance soon thereafter so it doesn’t hurt to give it some thought at the onset of a savings plan.
They say that hindsight is 20/20. This means that you can see perfectly when looking backwards. If looking backwards made you wealthy then historians would be the richest people in the world. They’re not. To create wealth you must look forward. I like to think that the past is like reading the rulebook for the game you are playing which in this case is the investing game. It’s not necessary, you can just jump right in and learn along the way, but if you learn the past it can save you from making a lot of costly mistakes and it establishes accurate expectations. Establishing accurate expectations is important or else you will have unrealistic expectations that can lead to bad behavior. By bad behavior I mean unrealistic expectations can lead you to change an approach that is working or about to work for something that probably won’t. The grass is not always greener.
One of the first lessons I learned when I first started investing is the focus of this tale. A wise and successful investor taught me that investing is not like normal work. You don’t get paid by the hour, by the piece or for your efforts. You get paid to succeed. You succeed by making money not by taking action. So he would say “When you walk into the office in the morning, if nothing needs to be done that day, your job is to do nothing. If you do something that day then you are not doing your job.” This wise and successful zen master taught me many lessons but this was primary in his arsenal. Other tales will focus on when to do something but this tale has deep undertones that support doing nothing vs. doing something.
This tale is a Behavioral Tale because primarily it demonstrates the pitfalls of what behaviorists call the group mentality or the herd mentality. It also teaches that past performance is not an indication of future performance and investors must know how it is your Hired Asset Manager or HAM generates the types of returns they do. To succeed investors must understand the risks that each investment in their portfolio represents.
One of my favorite life lessons centers around President Franklin Delano Roosevelt, also known as FDR. FDR had many strengths but I think his greatest was his ability to recognize that things are not always black and white. I think his ability to see the big picture as well as discern the subtleties of a situation is what made him such an effective leader and brought out the best in others.
Topics: Behavioral Tales
"We interrupt our regularly scheduled release with a breaking news Tale bulletin. Due to the recent events I think you might gain some perspective from this tale."