C&B Notes

Good Advice Doesn’t Change

Congratulations to Jason Zweig, who was recently awarded the Gerald Loeb Award for business journalism.  He took the opportunity to recap what he tries to accomplish as a personal finance columnist.  The entire piece is worth a read, but we wanted to highlight the following points:

  • Investors mustn’t chase performance.

That’s because good advice rarely changes, while markets change constantly.  The temptation to pander is almost irresistible.  And while people need good advice, what they want is advice that sounds good.  The advice that sounds the best in the short run is always the most dangerous in the long run.  Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time.  Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold.

  • Investors are better when focused on the long-term (or perhaps, more specifically, ignoring the short-term).

It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news.  It’s also no wonder that the media has ignored those findings.  Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution… But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain — and making most people prone to believing that every blip is the beginning of a durable opportunity.

  • This time is never different (or brand new).

History always rhymes.  Human nature never changes.  You should always become more skeptical of any investment that has recently soared in price, and you should always become more enthusiastic about any asset that has recently fallen in price. That’s what it means to be an investor.