I've spent a lot of time in the business of managing portfolios, making investments, trading securities, researching strategies, etc...over 34 years now. And it can be made into the most confusing, esoteric, and complex process imaginable. For nearly a decade, I was sucked into this world of esoterica. I was impressed by how complicated an investment strategy could be. Then I had a conversation with a man named Paul Sarnoff. He was a very highly respected commodities trader in the '70's and '80's. I was a floor trader for a major brokerage firm at the time - I was one of those people that stood in a trading pit and yelled at the top of my lungs trading gold and copper for the firm's brokers and clients. Paul ran commodities funds and he would frequently call us on the floor to get a feel for how the trading day was going. On one particular occasion, he sighed and lamented the tough market he was in at the time. He had been doing poorly (as all traders do from time to time) and he was near the end of his career I think. In a moment of candor, he said to me that it was all a crap shoot...and that he didn't understand "the market" anymore. By that, he was referring to the gold market.
It struck me as sad that a legendary investor like Paul felt this way after several decades in a market trading hundreds of millions of dollars. Several years later when I was a young man sitting on a stock trading desk on Wall Street, I had a similar experience watching seasoned traders lose money nearly as often as they made it. And there was a distinct air of gambling about it all. Around this time, maybe 1988 or so, I read an article by Jack Bogle, legendary founder of the Vanguard Group of mutual funds. It was my introduction to indexing, the investing approach to buying a very low cost, diversified basket of stocks and holding them come what may. The basket would periodically rebalance to represent the market it was tracking, i.e. large stocks in the U.S. (He subsequently wrote at length on this topic in Bogle On Mutual Funds in 1993.)
Today I tell investors that they have no business investing their money in a manner that doesn't make sense to them; they are not allowed to put on blinders and hope for the best. Investors bear some of the responsibility of their investment outcomes. They must make the effort to understand how their money is being invested, at least at a high level. The most dangerous thing anyone can hear from a "financial advisor" is that the strategy is too complicated to explain or better yet, they can't share their secret sauce because then others would crowd into the space taking away the opportunity to make money. These comments are the bastions of scoundrels. When you hear these words, you're about to be ripped off. There, you've been warned.
A solid investment strategy has the following characteristics:
- low cost (investment costs come directly out of your returns)
- tax efficient when used in brokerage accounts as opposed to a retirement account
- diversified so as not to be too risky
- well vetted by independent third parties (academia being an example of this)
- readily available to all investors
- based in economic rationale; appeals to your common sense
There are several strategies that are deserving of your attention. Sadly there are countless more that you should run from as fast as you can.