07 Jan 12 Timeless and Invaluable Investment Lessons from Dilbert
It was BigFatPurse’s year end event in 2014. Eric from Aggregate was browsing our bookshelf and he asked me which is the best investing book.
I guessed The Intelligent Investor.
He replied, tongue-in-cheek, The Dilbert Principle.
I have always loved Scott Adam’s satirical comic strips of the office scenes. And so, this article was to laugh at our financial industry and ourselves, the investors. Dry wit aside, there are 12 serious lessons we can learn.
I have illustrated memes on 7 types of investors which may be of interest to you if you like such articles. But do not expect me to be as talented as Scott.
#1 Beware of High-Fee Funds and Sales-Focused Financial Advisors
Most investors put their money with the professionals. This is understandable as a complex society follows Adam Smith’s division of labour philosophy. We do what we do best and we outsource other tasks where others do better than us. However, the financial advisors are likely to introduce mutual funds (or we call them unit trusts in Singapore) to you if you are keen to invest. These mutual funds are known for their high costs which would eat into the investment returns. The fees may include sales charge, annual management fee, buy-sell price spread, trustee fee, fund switching fee, and withdrawal charges.
I am not saying all funds and financial advisors are bad. You just have to be careful.
#2 Most Actively Managed Mutual Funds Are Unable to Beat the Market Consistently
Studies after studies were proving that most actively managed funds are unable to outperform the relevant benchmark indices. The statistics are worse if we eliminate survivorship bias, whereby the research include funds that were closed due to poor performance. There are funds which beat the index, but not all these funds continue their achievements. The worst strategy is to keep buying the top performing funds, as these funds will suffer from the winner’s curse (funds get more capital after a good run in the market and they are forced to buy more stocks at higher prices). There was also a research that a group of monkeys can randomly pick a winning portfolio that beat the index. It is a very blurred line between skill and luck, especially in the short term (less than 5 years). Sometimes picking a good fund is as tough as picking a stock yourself.
I am not saying all funds cannot beat the market. You just have to be careful.
#3 Most Hedge Funds Too, Are Unable to Outperform the Market
Warren Buffett made a 10-year bet with Protege Fund Managers that hedge funds are unable to beat the index after factoring in their high fees. The Bet started in 2008 whereby the Protege Fund Managers selected 5 hedge funds while Buffett chose the Vanguard S&P 500 Index Fund. In early 2014, the review of results showed Buffett led the bet with 43.8% as compared to the hedge funds’ returns of 12.5%.
I am not saying all hedge funds cannot beat the market. You just have to be careful.
#4 Know Your Investment Option of Index Funds
All investors should know the alternative option of a low cost index funds (less than 0.5% annual fees) as opposed to mutual funds. Index funds have matured and are gaining more market share each year. They are too good to be ignored and most investors are likely to do better financially by sticking to an index fund for the long term.
I am not saying that all index funds are good. You still have to be careful.
#5 DIY Stock Picking and Market Timing are Not As Simple As You Think
Capitalism has evolved to a state where personal agenda has trumped shareholders’ interests. Employees want to please the boss, not the customers. Managers paint rosy pictures to escape their bosses’ questioning. The CEO gets the wrong perception about the health of the business and may even add more optimism when he speaks to the analysts. Media and gurus present these information to the public which retail investors may obediently follow. You need to be some kind of a contrarian who are willing to do some detective work and find investment opportunities that few found them comfortable to buy.
I am not saying that it is impossible to DIY your investments and beat the market. You just have to be careful.
#6 Stop Looking for Stock Tips
We like tips because it saves us time and effort to research and understand the complexity of investments. But there are no free lunches in this world. Stock tips are more costly than we think. Even if the stock guru has well intentions and mention a stock he genuinely believes in, his risk tolerance and investment timeframe may be vastly different from yours. The Guru may be bullish about the stock but need 10 years time frame and the ability to stomach a 50% paper loss in the process. However, the retail investor may have a time frame of 6 months and can withstand a paper loss no greater than 10%. This mismatch of contexts is the root of investment losses from tips.
#7 Do Not Follow Your Stock Brokers Blindly
Not all brokers know their stuffs. Yes, they may be licensed and have accreditations but these do not automatically qualify their stock picking or market timing abilities. These skills take time to master. Going by the contrarian rule, I would rather avoid brokers’ recommendations as the stocks may attract too much attention in the first place, and I am not sure how many people had the information before me. But I know I am not the first.
I am not saying that all brokers are bad. You just have to be careful.
#8 Do Not Follow Analyst Reports Blindly
There are Buy-Side and Sell-Side analysts. The former are analysts employed by funds and their reports are internal to the firms. The Sell-Side analysts publish their recommendations to clients, other firms and even the public. A firm may have Sell-Side analysts and an investment banking division. The investment bankers are the deal makers for companies seeking for listing, mergers, acquisition, etc. There must be a Chinese Wall, which is a barrier for communication and information flow, between the Sell-Side analysts and investment bankers. This is to prevent analysts from publishing favourable reports to influence investment banking businesses. But who knows how ‘strong’ these walls are and if the analyst reports are truly independent and objective.
I personally think most analysts are ethical in their endeavours. More importantly, I do not use their reports because I disagree with their valuation approaches, which can be subjective at times. Ten analysts, ten different valuations. Second, the stocks they covered tend to be popular stocks which I tend to avoid.
#9 Buying Into ‘Good’ Management Maybe Overrated
Each year, every public listed company has to hold an Annual General Meeting (AGM) with the investors to pass certain resolutions. Some AGMs have deteriorated into complain sessions. Shareholders would just berate the directors. I started to think how dreadful these annual rituals must be for the directors to go through. But who cares when it is only one day per year. As the saying goes, “go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it.”
#10 Beware of Unreasonable Desire for Instant Gratification
This is the biggest problem for retail investors. We live in a fast paced world and almost every desire can be fulfilled quickly. Hungry at wee hours? No problem, McDonalds 24 hours. Want to watch a show? Pay and watch on-demand movies immediately. We transposed this instant gratifying expectation to the stock market, thinking that our investments will grow the moment we buy the stocks.
#11 Beware of Trading and Stock Picking Softwares
Technology has enhanced many areas of our lives. And it is no doubt that tech can be applied to the investment field. Many forex robots, mirror trading and stock screeners have appeared in the marketplace. It is more important to understand what are the strategies and approaches used in these softwares and see if you agree with them. Technology improves the ease of use and it is not supposed to replace investment principles.
#12 Beware of Investment Courses
It is not surprising to see advertisements of investment seminars promising quick and easy money. This is bad as attendees would go with a wrong expectation to begin with. Attending seminars alone won’t make you rich. It takes diligent learning, application, reflection and real experience to become a good investor.
We run courses too but we do not promise you can get rich quick as we are wary of attracting the wrong crowd. Seminars are just starting points. Think golf lessons. It doesn’t make you a good player after you have completed the lessons. What happens after the course is more important than the course itself. This is the reason why we have continual coaching sessions. Investment is a journey which we walk together.