Show Notes
Obviously, more experienced investors who know a lot about investing and the financial markets must do better than those with limited investing knowledge; right? The empirical evidence is very compelling when it comes to answering this question with a loud and resounding, NO.
Jeff Harell provides research to support why simpler is often better than sophisticated when it comes to investment strategy, as well as a shocking real-life example of how not knowing much about investing can lead to impressive results.
This episode will leave you feeling confident that not only is investing wisely simple and effortless, but extremely rewarding as well.
(Season 2 Episode 1)
Resource Mentioned in Episode:
Article from The Motley Fool, “Why Long-Term Investors Have a Leg Up on Hedge Funds”
Other Episode Referenced:
Podcast produced by Ted Cragg of QuickEditPodcasts.com
Music Credit: Dream Cave / Adventure Awaits / courtesy of www.epidemicsound.com
Transcript
Everyone listening has probably been in a conversation with someone who loves to talk about their investments. It often sounds like they are in a cult that requires the use of investment jargon that you probably don’t even understand to make them sound super smart and sophisticated. I can’t begin to tell you how many stories I’ve heard from people over the years about some type of complicated investment strategy that was making them a ton of money.
While these investors seem to suggest investment expertise is essential to being a great investor, my real-world industry experience suggests that—more often than not—the less you know about investing, the better your results.
Welcome to the second season of Invested Poorly: Sad Tales of FInancial Fails, a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.
Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with show.
As you can probably imagine, during my two-decade career in financial services, I heard a lot of stories about interesting investment strategies. It’s just the flat-out truth. A lot of people love to talk about investing. All my friends know I’m an investment guy, so the stock market always seemed to come up when we were out to dinner or just watching a football game or something.
When I speak at events, it is always great to have attendees come up afterwards seeking advice about their personal financial circumstances. Most of the time, they are eager to pick my brain to get ideas about how they should handle a situation. However, there always seems to be one or two attendees who wait patiently to speak with me until everyone else is done because they can’t wait to tell me about some stock or investment they bought that went through the roof. Although I’m always professional and enjoy listening, in the back of my mind I’m pretty much tuned out because, from what I’ve seen over the years, these stories are typically either luck, or far from reality.
One example of this comes from a former client of mine who got into option writing. I don’t want to bore you to death with the specifics of the strategy, but basically it was a strategy that made money as long as small cap stocks did not do exceptionally well over a short period of time. This particular option writing strategy places a large amount of money at risk, to generate a small positive return every couple of weeks. After my client read about this strategy and started following others who were doing it, he decided to try it for himself. At first, he was only putting $5-$10 thousand dollars at risk and making a couple hundred bucks every week. This was just him getting his feet wet.
As the weeks went on and he kept seeing a positive return, the size of his investment in the strategy began growing. This went on for at least four or five months and he never once had a losing week. Needless to say, his confidence was very high, and his investment amounts kept getting bigger, and bigger, and bigger.
Eventually he was risking hundreds of thousands of dollars on this strategy every week. Unfortunately, as happens so often when it comes to investing, hubris was eventually met with humility. As I previously mentioned, the strategy was profitable as long as small cap stocks didn’t rise dramatically in a short period of time. I honestly can’t remember what the news was, but at some point something sent small cap stocks up over 5% in one day and more than 10% in less than a week.
In a matter of days, every penny of profit my client had made was wiped out and then some. Now, the good news is, the majority of his losses were actually gains, so it didn’t materially affect him financially. However, the memory of this event would remain with him indefinitely, leaving a mental scar that I don’t think he ever really recovered from.
On the flip side of this story is perhaps one of my most unforgettable prospect meetings ever. So, whenever I met with a prospective client, we would review their investment statements ahead of time and then prepare a report analyzing their current holdings. This particular analysis may have been the simplest one I ever performed in my entire career. The prospective client was a doctor with all of his accounts at Vanguard, invested in the exact same mutual fund. The Vanguard Total Stock Market Index. The total value of all his accounts was over $8 million.
So, before I even walk into the meeting, I’ve already made an assumption about this guy. I’m guessing he is a do-it-yourself investor who is well-versed on investing in the stock market. I’m sure he knows that index funds are really hard to beat and that investment advisors are a total waste of money…I was dead wrong.
I started off the meeting telling him how impressed I was with his ability to accumulate so much money over the years and how simple he kept his investments. I then asked him a question or two about the stock market, just to keep the meeting going. Shockingly, it became obvious that he didn’t know a thing about investing. I was totally confused and eventually I just asked him, how did he get to where he is today without really understanding his investments. His response was priceless. He simply said that over 20 years ago his CPA told him to open an account at Vanguard and just keep putting money in it. That’s all he did.
I have never forgotten the look on his face after he made that comment. It was one of total humility, not arrogance. I absolutely loved it and even told him I would be using this story as an example of how successful investing can be when you keep it simple, stay consistent, and remain patient.
If you still need more convincing that simpler is better when it comes to investing, look no further than advice from one of the greatest investors of all time, Warren Buffett. I’ve included an article in the show notes that highlights how important patience is to long-term investing success. The article mentions Jeff Bezos, the founder of Amazon, recalling a conversation he had with Buffett in which he asked him why more people didn’t follow his straightforward, simple approach to investing. Buffett’s exact quote: “Nobody wants to get rich slow.”
This makes perfect sense coming from the famous billionaire investor because most people don’t realize Buffett accumulated over 99% of his net worth after the age of 65. As my adorable, though sometimes impatient, little niece would say, “that’s a long time.”
But the fact is, slow and steady wins the race. This is a reminder, especially to younger listeners, about the power of starting to save early and the benefits of compound interest, which I touched on in Episode 4 of Season 1.
I love all these stories and I think they epitomize one of my favorite investment phrases I like to say to people, which is, “If you can’t explain your investment strategy to a fifth grader, then it’s too complicated.” I hope this episode drove that point home and will give you even more confidence that simpler is better when it comes to investing.
I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.
Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen”! So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.
I’m your host, Jeff Harrell. Thanks for listening.
Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.
This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.