Investing Is Not a Magical Pretend Business

It’s funny how a lot of the conventional thinking with regard to investing is focused on being deliberately ignorant and purposely conformist. The conventional mindset among both individuals and advisers is that we should just focus on asset allocation, periodic rebalancing and patience. That’s all. Just do that and watch the money come in, eventually.

In every other type of business venture, we prize creativity and innovation. A unique product or service can be a tremendous competitive advantage. Had Steve Jobs decided that his business plan was to do exactly what Michael Dell does, the story of Apple would have been much different. If Ford, Honda, Mercedes and Bugatti all built the same car at the same price, there would be no reason for more than one of them to exist.

Beyond being innovative, successful business owners tend to be proactive about protecting themselves against hazards that could have devastating consequences. They put locks on the doors, buy fire insurance and avoid extending credit to hobos. If water is pouring through a gaping hole in the roof of the warehouse, they fix it rather than blithely assuming that these kinds of events are normal and will eventually go away.

The standard approach to investing entails replicating a generic asset allocation plan then populating that plan with low cost index funds. Sometimes you rebalance the investments to stay in perfect conformation with the generic plan. If risks present themselves you must ignore them because the plan is a good one that has the approval of a guy that won a Nobel prize! You don’t know him, but trust me, he is very smart. In return for patient allegiance to the generic plan that everyone should copy, we expect a lifetime of returns that beat inflation.

Of course, many people want to take a more active role. Investments are selected by doing research. [Sarcasm Alert] They will do the hard work of uncovering gems by looking in Value Line for stocks with a low p/e. An adviser will make sure to stay on top of things by reading the reports written by the firm’s investment strategist – you don’t know him, but he is very smart. We will pick talented fund managers by reading information compiled by Morningstar. This is a good strategy because a lot of people aren’t willing to go all the way to the library to conduct research. [End Sarcasm]

The assumption that we deserve good returns by doing exactly what everyone else does, with information that everyone else already has, flies in the face of common sense. Doing this while purposely ignoring risk is lunacy. An adviser that is not willing to work hard enough or smart enough to create an innovative approach is a dead man walking. The traditional, generic approach isn’t worth paying for and will not last.