What Works, What Doesn't

Ok... Then what works and what doesn't work in the investment Business ?


  1. Emotional Investing or feelings. Many studies compared the more disciplined process-based returns of Index Funds and Mutual funds to the average investors return. Dalbar is one company that publishes these studies. I have seen earlier studies starting in the 1980's which are roughly the same 30 years later! The gap is very wide between the two groups. It generally shows the disciplined investment group earns about two to three times as much as individuals.! That is if the indexes are up an average of 15%. The individuals will be up about 3%.

No one I have seen thinks it is because individuals are not as smart. No that's certainly not true. The opinion is that the disciplined group endures the market longer and does not use their gut feeling to get in /out.

Emotionally improvising is fine for great Jazz Musicians, Stan Getz, Lionel Hampton. But in the markets, it's a fool proof way to minimize returns and maximizing risks.

  1. Following Gurus or watching them on TV. Gurus whether working for Major Brokerage firms or independently do not last long, look back you'll see they are popular for about 3 years. Their job is to get eyes on the screen for ad revenue - not to be a Fiduciary for your money. One guru followed by a tracking service which reported their last 700 trades were about 40 % successful. You would expect a 50% success rate by just flipping a coin!
  2. Paying excessive fees and not getting something of value in return. Its like having a 300-pound jockey on your horse.


 Having a disciplined Process.  This five-step process is one used by successful Institutional Investors:

  1. Set clear Goals. In the late 1970's institutional goals would often conflict “we want to Maxime returns while minimizing risks”

  2. Write a clear written policy or Principles.

  3.Create a strategy

  4. Implement your strategy or hire someone to execute the strategy.

  5. Review results against your Goals at least once a year. A portfolio does not perform in a vacuum. The three factors are the 1. Environment, 2.The Committees decisions and 3.Investment Managers decisions. I used to start my investment committee meetings by saying” the investment committee gets credit for all the good decisions and the Manager get blamed for all the bad decisions.” Then we would explore all three factors.T his served as a little comedic relief for what followed - 45 minutes of numbers- and a reminder of our agenda and purpose for being there.

Make adjustments as necessary. Be careful in changing managers because of underperformance in less than a market of cycle 3-5 years. Its expensive and you are not guaranteed the replacement is going to perform better. Of the 10 reasons for changing managers", performance "is in the middle of the list (5th) for reasons managers were replaced. IT IS TRUE “past performance is no guarantee of future results”. Manager performance is like musical chairs. The ones in the top quartile don't stay for long.

Recipes for creating a strategy

  1. Modern Portfolio Theory/Efficient Market Hypothesis
  2. Adaptive Market Hypothesis
  3. Behavior Theory