Ignore the Hype. Brian Perry

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Figure 1.2 Hedge Fund Closures by Year

      SOURCE: Analysis by Brian Perry. Information courtesy of Zero Hedge.

The answer of course, is that the struggles of the so-called smartest investors in the world provide further proof that “beating the market” is an incredibly difficult endeavor. Professionals, as well as amateurs, should carefully consider what inherent advantage they hold over their competition, and why it is that they are likely to succeed when so many others fail.

      The Impact: Consider the resources available to a hedge fund, pension fund, sovereign wealth fund, or mutual fund while remembering that even with the plethora of tools at their disposal they still face a difficult path to success. Remember, too, that trading is a zero-sum game, and that for every winner there needs to be a loser. Now think of the resources you have available for trading – a home computer and access to the Internet, maybe conversations with your broker, or access to the market analysis tools on the online trading platform you use.

      In 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 СКАЧАТЬ