Mark Cuban, billionaire owner of the Dallas Mavericks, is pretty easy to like. He’s a smart, passionate, high energy guy and writes a really interesting blog. However, even smart billionaires are wrong from time to time.
In a post from earlier this year titled, “Wall Street’s new lie to Main Street – Asset Allocation,” Cuban gets a lot right, but misses a larger point. He starts strong:
The greatest lie ever told used to be Wall Street telling main street to “buy and hold”. Of course that’s what they told you every chance they got. It’s not what they did. The holding period for stocks dropped from 8 years in 1960s to 2 years in the 1990s and 8 months in the 2000s. Today, stocks are bought and sold in milliseconds. Which is one of the big reasons you don’t hear much about buy and hold any more. That and the fact it didn’t work. I think individual owners of stocks finally came to understand that old saying “Fool me once, shame on you. Fool me for 50 years, shame on me. “
This is true for the most part and something that I have made a note of in the past. Where he is off here is in his assertion that you don’t hear much about buy and hold any more. Shockingly, the old buy & hold zombie march is not only still going strong, but remains the standard recommended approach.
But Wall Street needs a marketing slogan doesn’t it ? How else are they going to get all the suckers back into the market ? So what’s the new mantra that all those brokers, mutual funds and ETFs want you to buy in to ?
Asset Allocation (Aka diversification) is the best approach to investing. Everyone is talking about asset allocation. It’s not a surprise given all the new funds, REITs and ETFs that have popped up in the last couple years. The more diversification sold to individuals, the more money to buy them all. Wall Street has to sell what it has doesn’t it? It’s just good business for them. But not for you.
If by “new mantra” he means “mantra that has been standard guidance for the last 30 years” then he’s right. The emphasis on asset allocation was popularized by the ascension of Modern Portfolio Theory (MPT), which Markowitz originally wrote about in 1952. In fact, one of the main reasons that the buy & hold strategy became so popular was the illusion of protection that being diversified offered.
No longer does Wall Street even want you to consider buying what you know. Remember Peter Lynch describing how buyers of stocks should pay attention to what they see in the mall and elsewhere and use that as a source of ideas and information? Or Warren Buffet suggesting that we should actually invest in things we know and look for the value there? Well you can forget about that kind of investing.
Today, your investment advisors want you invest in things you have absolutely no fricking clue about and have pretty much absolutely no fricking ability to learn about.
They want you to diversify into Emerging Markets, Commodities, International Bonds, Munis, Real Estate Investment Trusts, ….and.. well, a lot of different “stuff”…
This is where it gets fun. If he wants to believe the hokum that by walking around the mall you can actually learn something worth knowing about a stock, that’s fine. If he wants to believe that Warren Buffet is just a simple fellow guided by plain old common sense, that’s fine. But if all you have to do is study, why are so few people able to consistently beat the market? Why aren’t there thousands of Peter Lynches and Warren Buffets?
When information is free and instantly available to everybody on the planet at the same time, there is no edge to be gained by using it. If you want a real eye opener on the limits of what fundamental information can teach, try looking at the insider buying activity in banks and home builders in 2007-08. People with far greater knowledge than any arms-length investor could ever have often get it wrong.
I am an advocate for investing in things you don’t have any fricking clue about, for a legitimate reason. You can’t know enough about any investment to avoid being blindsided. If you think you can, you’re in a far worse position. The number of portfolios wrecked by hubris far outweigh those wrecked by humility. But the reason I diversify isn’t really for downside protection, that’s what sell stops and dynamic position sizing are for. Diversifying is for upside.
None of us knows where the big drivers of growth will come from next year. Could be a Turkish stock index, or sugar or junk bonds or a hundred other things. Nobody knows. But if we cast our net widely enough, chances are we’ll catch a few. If we can do that while limiting the losses from those that don’t work as hoped, we’re in good shape. If we concentrate on just what we think we know for sure, we might get lucky or we might get what most investors that attempt this get. Lackluster returns with an opportunity for spectacular flameout.
Don’t be a sucker. Remember this. It’s better to make less, or next to nothing than to lose everything. Don’t get greedy. Don’t get desperate. The stock market can’t save your financial future, but it can end it .
Truth, but unrelated to the concept of asset allocation. In fact, most people diversify for exactly the reasons he espouses here. The problem is that they are often unaware that the protection of diversity often goes away just when you need it most. Most investors, including Mr. Cuban, would be tremendously better off by learning that managing risk is the low hanging fruit in any investment strategy. It’s the most overlooked, most important, least understood component of portfolio management.