The world’s smartest investors have failed …

Time and again, we see a phenomenon recurring. Experts fail to live up to what they promised. It only goes to prove that while these people are smarter than many others, the combined intelligence of the markets remains unbeatable for long. Read this post by Motley Fool:

The World’s Smartest Investors Have Failed: The poor performance of hedge funds

In the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”, we have mentioned many such anecdotes when either the experts failed to deliver on their promises or they failed to beat the market or both.

The truth is: There are no experts, only varying degrees of ignorance.

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Knowledge and expertise are not fungible

“All of them were clearly intelligent and knowledgeable about a great many things – as long as those things had nothing to do with their money.

Most of them simply didn’t understand the principles of investing.”

Liz Davidson, Founder and CEO of Financial Finesse writes in the book “What Your Financial Advisor Isn’t Telling You – The 10 essential truths you need to know about your money”

Financial Finesse is a sort of a helpline in the US for people to get guidance on their personal finance matters. The above lines talk about the behaviour and attitude of generally intelligent and successful people. These are educated and intelligent people, successful in their respective fields of work. However, that expertise and knowledge are not fungible. Expertise in one area may not mean expertise with money.

In the absence of proper knowledge one is unable to understand or see the risks properly. Half knowledge can sometimes be dangerous. As we know from the Mahabharata, it was half knowledge that actually killed Abhimanyu.

As with Abhimanyu, who could not get out of the seventh chakra of the chakravyuh due to insufficient knowledge, many investors have painfully found that it is easy to get in an investment, but it is most difficult to get out of it, if one does not know enough.

Be careful with your investment. If required, take professional help.

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The need for diversification

Why do we need to diversify?

Well, very often, people look at the performance of a diversified portfolio and compare it to one part of it. And obviously, at any point of time, the portfolio is going to underperform at least one part of itself – if it is diversified well enough. What gets discussed in public including media and what draws everyone’s attention is the winners – be it in real life or in investment markets.

However, this knowledge is available always in hindsight – after the event is over and not before. By the time someone acts on this knowledge, the gains are gone already and one ends up buying the investment at a high cost.

Many investors know that they are not the experts and hence they seek expert advice assuming that advice is equivalent to the ability to forecast. However, it is important to remember that “there are no experts, only varying degrees of expertise.” The track record of experts even in their field is very discouraging when it comes to prediction about the future. They are not even consistently wrong, just erratic.

If that is the case, what should one do?

“That’s what diversification is for. It’s an explicit recognition of ignorance.” – Peter Bernstein

Diversification is not just a recognition of ignorance, it is also a shield against one’s ignorance and stupidity.

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Market crash or reputation crash?

If you want to see what market booms and busts can do to one’s reputation, Professor Irving Fisher’s statement in October 1929 would be a most appropriate example

Read more in the book “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

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Even Big Ben wasn’t infallible

Going back to 1929, it is important to look at what happened to one particular gentleman and what impact it had on the whole society. Benjamin Graham was a young and upcoming investment manager and a professor. He had built good reputation as a portfolio manager and was managing a sizeable sum of clients’ money.

While he seemed to have seen the danger, he continued with his investment portfolio. At one point of time in 1929, while discussing with the legendary Bernard Baruch, young Ben Graham mentioned, “… someday, the reverse should happen.When he reflected on events some years later, Ben found it strange that though he sensed danger, he did not completely sell out of the market. (Ref: “Benjamin Graham on Value Investing – Lessons from the Dean of Wall Street” by Janet Lowe; Published by Penguin Books).

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