Ignore the Hype. Brian Perry

a zero-sum game, where the competition is a trillion-dollar sovereign wealth fund or a trader at Goldman Sachs, is it realistic to expect consistently repeatable “victories”?

Success is possible of course. After all, David did slay Goliath, and the U.S. hockey team did beat Russia in the 1980 Olympics. But remember that the nickname for that epic victory is the Miracle on Ice, which should tell you pretty much everything you need to know about the long odds the U.S. team faced. To each his own, but I'd personally rather not have to rely on divine fate in my quest for financial independence.

      Even if you are inclined to await Divine Providence, ask yourself this: If those two hockey teams had played 10 times, 20 times, or 100, how many matches would the United States have won? I don't know the precise answer to that question, but I do know that if the Americans were likely to win more often than not, the victory in Lake Placid wouldn't have been so memorable.

      This is important because with very few exceptions the road to financial success requires repeated victories, as opposed to one shining moment. Because of that, whatever investment approach you choose needs to be repeatable, so that success can be replicated again and again over the course of years and decades.

      And so, I repeat, what inherent advantage do you hold over Goldman Sachs or a large hedge fund, and is this inherent advantage something likely to lead to repeated victories?

      You need to answer that question for yourself, but the key is to answer it as honestly as possible.

      Personally, I'd rather avoid competing with the big guys and instead focus on strategies for success that don't rely on playing a zero-sum game. Better still, I want to utilize strategies that can be consistently applied in order to produce sustained success across years and decades.

      Those strategies do exist. And if you have the discipline to stick with winning strategies and avoid the mistakes that doom many investors, you'll be well on your way to financial independence.

The Bottom Line

The continued acceleration of the flow of information and cost reductions for trading securities have provided you with ever greater ability to take control of your finances. However, these benefits come with a warning signal. Because the very tools that allow you to take a proactive approach toward building your financial future also exacerbate those basic human instincts toward fear and greed.

      With that in mind, one of the most important things you can do if you hope to achieve financial freedom is to find an approach you can stick with regardless of the stresses society or your peers put on you to change your approach midstream or to take action at what potentially might be just the wrong time.

Chapter 2 Don't Play a Game That's Rigged

      So, if attempting to mimic the behavior of institutional investors by analyzing and reacting to the day-to-day gyrations of financial markets is unlikely to produce the outcomes you desire, what should you do?

      The answer is fairly simple and one that you've undoubtedly heard before. You should start with a financial plan that clarifies and specifies your financial goals. Then, you should find an investment approach that works for you and stick with it for the long haul. And of course you should do all of this in a tax-efficient manner, since a dollar saved is a dollar earned.

      Of course, that's “boring” financial advice and also easier to say than to do. Therefore, the remainder of this chapter will attempt to provide you with a better understanding of why financial advisors often give this advice. This chapter will also demonstrate the downside of deviating from your long-term approach.

The Upward Path of Markets

The Grand Canyon is one of the world's most iconic sights. I've known many people who have visited, and none have ever come back disappointed. The sheer immensity of the crevice gouged from the earth boggles the mind. Standing on the cliffs and looking at the floor of the canyon 6,000 feet below, you see the Colorado River. At that height the river looks small, which makes it even more amazing when you stop to consider that it's that river that created the canyon.

      The river is heavy with sediment and over the course of some five or six million years, it has gradually ground away at the surrounding rocks. The result is an ever-deepening ravine. The present view, the one that draws millions of visitors from around the world to stare in awestruck wonder, is the result of that river.

      Of course, six million years is a long time. If we were able to step into a time machine and flashback to the point at which the Colorado River first began its work, the resultant view might not be very impressive. Sometimes, great doings take a while.

Such is the case with compound interest. Just as the silt in the river eventually carves a magnificent canyon, so, too, does compound interest turn small sums into large fortunes. Unfortunately, though, the urge to shift in and out of markets often prevents people from enjoying the true benefit of this magnificent power.

Figure 2.1 S&P 500 (1927–2019)

      SOURCE: Data courtesy of MacroTrends Data Download.

      Let's take a look at what compound interest can do across long periods of time. We have data going back to the 1920s, and we can use this information to measure progress and performance. Of course the world was very different back in the 1920s, but it's helpful to take a look at a long data series because it incorporates many different political, economic, and financial environments.

The message that data gives us is quite clear: over very long periods of time, investors who resist both the urge to speculate and the urge to panic do very well, indeed (see Figure 2.1).

      What's really interesting about the chart is that it doesn't look like anything happens until about 1980. This is an illusion, given the scaling of the chart, but the visual also demonstrates a deeper lesson. Just as the Colorado River did its work for countless millennia before creating one of the most impressive sights on earth, compound interest does much of its work in the background. For years, its effect might not be apparent. But when its impact does burst forth, the effect can be magnificent.

The chart also shows that there have been bad times over the past nine decades. Undoubtedly, there have been many periods during which it was tempting to abandon the market until it was “safer.” With the power of perfect foresight and the ability to consistently time your way in and out of the market, this might've been a good approach. But as will be discussed in greater detail later in this book, that perfect foresight is a very rare commodity.

      So, if we work off the assumption that you don't have the ability to see with perfect clarity what the future holds, it becomes clear that, despite the many fluctuations the market has encountered, the long-term trend has been higher. What that means is that if you want to achieve success, you must participate in the financial markets even though doing so will undoubtedly subject you to a great deal of volatility and perhaps even some sleepless nights.

      Remember, having a portfolio that fluctuates in value has almost never prevented someone from meeting their financial goals. However, not benefiting from the power of compound interest and the long-term upward trend of financial markets has prevented many people from living the life they deserve.

Asset Class Returns