Investing is a complicated business. P/E ratios, Beta, Alpha, financial modeling, computerized trading, PHDs, MBAs, hedge funds, arbitrage, options, futures, commodities, mortgage-backed securities, ETFs, Mutual Funds, REITs, CNBC, FOX business, Bloomberg terminals, 10K, 10Qs, GDP, GNP, etc. etc. etc. You’d have to be a genius to do better than the Pros, right? Here’s the dirty secret. The majority of professionals don’t do as well as their benchmarks. One year’s star is next year’s loser. The fees upon fees that clients pay often eat into returns too. So what is the key to success? I n my opinion, it is “Independent Thinking”.
Most people go with the crowd. It happens in all aspects of life. At home, people call it “keeping up with the Joneses”. It’s human nature. Regarding investing, when we start hearing about people making money, we want a piece of it too. However, if others already had success, you’ll probably not get a good price on the investment. Anything with hype has a lot more downside than upside. The #1 pick in the NFL draft rarely becomes the star they are supposed to be. I am not suggesting you always take a contrarian stance on everything. Sometimes the crowd does get it right and even underestimates the potential of a new product or service, but the odds are against this. Things come into and out of fashion, and that’s fine for the clothing world, but we are here to make money, NOT to be fashionable. Invest based on the numbers and sound principles, not because the Joneses own it too.