[IP] more on Why You Suck at Investing
------- Original message -------
From: Robert Lee <robertslee@xxxxxxxxxxx>
Sent: 31/3/'05, 21:20
I have a friend, a stock broker, actually the biggest volume retail broker
for the company for which he works, who knows John Bogle, former head of
Vanguard. Bogle told him that his index funds over the last 15 years have
appreciated 8.x% per year but that the average (he did not define average
but does it really matter?) investor in these index funds had gained only
2.x% because they did not get in and stay in but rather traded in and out.
Brokers are people who have less money than you and manage your money until
you don't have any more.
If Bush simply wanted American citizens to make greater returns on their
Social Security he would the SSA invest 6% of the proceeds in these funds.
And if the government really believed the blather about the returns they
would guarantee some middle ground.
How much does it cost to administer one huge fund rather than 30 million
little ones? One FTE can administer the buys. There are precious few sells
if you subscribe to their blather.
So what is the reason for the individual accounts?
Just as Sarbanes Oxley inadvertently became a gold mine for the very
accounting firms that lucratively fostered the crimes they are now
lucratively paid to prevent, the individual accounts will inadvertently make
the Wall Street brokerages richer than they already are.
This individual account ruse is merely one more step on a path that started
with the advent of 401K's, which is really that the government has steadily
been moving the onus of a pension from corporations to the employee. Now
they are trying to get the government out from its responsibility to the
employee.
All this in the name of faith in the individual, personal responsibility.
Follow the pea.
I watched a TV show last night that left me wondering just how shallow the
shallow end of the gene pool is. Three celebrities were shown video tape
interviews of normal, even attractive people on the street, then asked to
guess which ones knew the answers to various questions. These were people
who spoke in complete sentences, whose verbs agreed with their nouns, etc.
Nothing about them seemed idiotic, dumb, insensate. Yet, these "normal
people" must have had two digit IQ's. I cannot for the life of me remember
any of the questions but the last one, which was what are the popular
initials for Health Maintenance Organizations. No one got it. I think
someone answered CIA.
These are the people who are going to make investment decisions. These are
people who do not know what an index is. I do not say that to be
inflammatory. There is no way these people could have known what an index
is and I doubt they could have retained it for more than two days given
fifteen minutes to learn it.
With this administration I have a fallback rule for issues I do not totally
understand. I derived this rule from the issues I do understand totally.
If they want it, I don't.
Robert Lee
-----Original Message-----
From: owner-ip@xxxxxxxxxxxxxx [mailto:owner-ip@xxxxxxxxxxxxxx] On Behalf Of
Dave Farber
Sent: Thursday, March 31, 2005 12:36 PM
To: ip
Subject: [IP] Why You Suck at Investing
------- Original message -------
From: Barry Ritholtz <ritholtz@xxxxxxxxxxxxx>
Sent: 31/3/'05, 7:41
Hey Prof,
I thought the IPers might find a different perspective on Social
Security reform interesting:
The discussion of the private accounts side of Social Security Reform
(as opposed to strengthening its finances) relies on a single premise:
That Human Beings are rational economic participants. That's the
theory underlying a range of behaviors, from retirement planning to
privitization schemes.
Problem is, it has been very well documented as false.
Humans are terrible at making the risk/reward analysis. As a species,
we are emotional, tend to have a very weak comprehension of time beyond
hours or days, are given to herd behavior, and have an awfully good
ability to self-rationalize. Oh, and we are just a tad on the emotional
side.
These reasons (and others) are why most people do such a lousy job at
handling their own investment monies. Its not just mom and pop, though
-- most pros stink, too. 80% of all professional money managers
underperform the S&P 500. Making it even more complex, its a different
80% that underperform each year!
I suspect most people know this intuitively. It's a large part of the
explanation why a majority of the public prefers a guaranteed insurance
plan (the current Social Security structure) versus private accounts
(The President's plan for privatizing risk).
If you want more details as to why Humans are not hardwired for the
capital markets, see these comments:
> Why You Suck at Investing
> http://bigpicture.typepad.com/comments/2005/03/you_suck_at_inv.html
>
>
> USA Today had an interesting article this past week (it happens). The
> discussion was on the fact that Most Americans no good at investing.
> A more accurate title would have been "Humans not good at investing."
> There's a very specific reason for this; It is something I am in the
> middle of writing up, and will address very soon in print.
>
> Meanwhile, here's an excerpt:
>
> ?"A study by Hewitt Associates that analyzed the 2003 investment
> behavior and account activity of 2.5 million employees eligible for
> 401(k) plans exposes a trove of investment mistakes by average
> investors:
>
> ?* Three out of 10 employees eligible for 401(k) plans don't
> participate, Hewitt says. That means investors are passing up free
> money in the form of matching contributions from their employers.
>
> ?* Despite horror stories about employees at scandal-scarred companies
> such as WorldCom and Enron having their 401(k) accounts wiped out
> because they had all their money riding on their own company's stock,
> 27% of 401(k) investors still have more than half of their money in
> their employer's shares.
>
> ?* And proving that investors are hardly hands-on, only 17% made
> 401(k) transfers in 2003.
>
> ?Another Hewitt study, done in fall 2004 with Harvard University and
> the Wharton School at the University of Pennsylvania, found that a
> "non-saving mentality" persists. The study focused largely on "low
> savers," those who do not stash enough in their 401(k)s to earn the
> company match. When "low savers" learned they were passing up $1,200 a
> year in matching contributions, one-third said they intended to raise
> their savings rate. Only 15% actually did."
>
> This factor, more than any other reason, explains why the President's
> Social Security Privitization idea has generated so little positive
> response amongst most Americans.
>
> Put aside the Social Security issue for a moment. I find the argument
> that people are not hard wired to be investors is quite fascinating.
> Wall Street uses a variation of this to suggest "professional
> management;" indexers use it to argue against active management;
> discount brokers say if you can do as well as the mediocre pros, then
> why pay big commissions?
>
> All of these positions miss the bigger picture: Why are Humans Beings
> so ill suited to investing?
>
> I first came across one of my favorite explanations as to why we
> simply aren't hardwired to undertake risk reward analysis in capital
> markets many years ago; It was from Michael Mauboussin , now Legg
> Mason Funds chief investment strategist, formerly chief U.S.
> investment strategist at Credit Suisse First Boston. In a cogent and
> persuasive manner, Mauboussin explains
> <http://www.capatcolumbia.com/Articles/FoFinance/Fof2.pdf> the reason
> why: "the mind is better suited for "hunting and gathering" than it is
> for understanding Bayesian analysis."
>
> Simply put, you just ain't built for it. Mauboussin breaks down the
> emotional and psychological impediments into 7 subtopics:
>
> ?· Desire to be part of the crowd.
> ?· Overconfidence.
> ?· Inability to assess probabilities rationally.
> ?· We love a story, especially when it links cause to effect.
> ?· Use of heuristics, or rules of thumb.
> ?· Chance.
> ?· Fitness landscapes and the role of the inductive process.
>
> Each of these are explained in more detail, but the bottom line
> remains: Most people simply do not posses the counter-intuitive
> skillset, or the emotional detachment, or the discipline required for
> long term outperformance in the markets . . .
>
Source:
Most Americans no good at investing
<http://www.usatoday.com/money/perfi/general/2005-03-23-investing-
cover_x.htm>
Adam Shell
USA TODAY, Posted 3/23/2005 12:12 AM
Updated 3/23/2005 1:14 PM
http://www.usatoday.com/money/perfi/general/2005-03-23-investing-
cover_x.htm
What Have You Learned in the Past 2 Seconds?
<http://www.capatcolumbia.com/Articles/FoFinance/Fof2.pdf>
Michael Mauboussin
March 12, 1997
http://www.capatcolumbia.com/Articles/FoFinance/Fof2.pdf
Cheers
Barry L. Ritholtz
Chief Market Strategist
Maxim Group
405 Lexington Avenue,
New York, NY 10174
(212) 895-3614
(800) 724-0761
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The Big Picture: Macro perspectives on the Capital Markets, Economy,
and Geopoliticsá
http://bigpicture.typepad.com/comments
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