Tuesday, May 29, 2012

It's a Simple Little System!

When someone tries to sell you a "system" - watch out!
Chances are, it isn't a "Trustful place for Trustful Invest" - whatever that means.

A friend of mine who worked at the Patent Office used to spend every spare moment at the track, betting on horses.   He was convinced that he could come up with a "system" for winning at the track, and even paid money for "tip sheets" and "systems" from other people.   Needless to say, he never really got ahead.

The problem with horse racing - and markets - is that they are chaotic systems that, while they have predictable aspects, do not have predictable outcomes.   There is no "system" for picking, consistently, winning horses.  There is no "system" for picking, consistently, winning stocks.  Anyone who tries to sell you such a system is basically lying to you - to get you to buy their system which is the only one "sure bet" in any casino.

Unfortunately, the vast majority of human beings need a savior - a charismatic figure, whether it is Warren Buffet, or Glenn Beck.  And they listen, with baited breath, for the latest pronouncement from these oracles of wisdom.

The problem with these gurus, is, of course, that they are not immune from failure.  And just because they have a track record of success, does not mean they always will.   And more importantly, as an individual, you need to save for retirement and not speculate in the market.   But most people prefer to do the latter, as it is more "interesting" than boring saving.

So they sign on for systems - and the people selling them will show them backward-looking data that shows that their system has amazing results.    But the problem with backward-looking data, is that it is only helpful for people owning a working time machine.   You need forward-looking data - and that simply doesn't exist.

So, for example, Joe Blow, who is touted as a Guru of the "Investment Portfolio System" is touted as have a great rate of return since 1985.   But then again, anyone who invested in any diversified portfolio since 1985 did pretty well.   The question is, moving forward, does his system make sense?

And if you look at his "system" since 1970, maybe it is a disaster, or just did OK.  You can pick starting and endpoints on a graph and make yourself look like a genius.

For example, I made a 1700% rate of return on AVIS stock since February 2009.  I must be an investment genius, right?  And if you invest in AVIS stock, you will see a 1700% rate of return as well, right?

Wrong.  Trends don't go on forever, and in fact, once something trends in one direction, you can pretty much bet it will trend the other way, at least for a time.   But when trends turn directions is tough thing to call - I called the Real Estate Bubble two years before it happened, and "missed out" on cashing in at the ultimate peak.   However, if I had called it two years too late, I would have been far worse off.

You can't time the market.  You can't use a "system" to do so.   All you can do is try to diversify your investments among a number of types, accounts, and companies - and even diversify within these.  (And no, putting your money into four things is not diversifying).

The best you can hope for is a reasonable rate of return.

Gambling your retirement, your future, and your ability to buy yourself out of hock, on some "system" touted by fanatics and salespeople, is just a sure-fire recipe for failure.   No one sells the goose that lays the golden egg.  If there was a sure-fire system to make money, why on Earth would anyone ever, ever tell anyone else, particularly YOU, about it?

They would not.


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