IT SEEMS EVERYONE has an opinion about the markets—and they are, of course, entitled to those opinions. But here’s the irony: Some of the most successful investors have also been among the least dogmatic in expressing their views.
Perhaps it’s the humility gained from repeatedly trying and failing to second-guess the financial markets. These veteran observers of markets are a stark contrast to the swashbuckling managers who flaunt their confidence about the likely direction of stocks and bonds—a sales strategy they use to encourage people to buy products they don’t need.
If what people need is the promise of certainty, the latter group will almost certainly attempt to sell it to them. Meanwhile, the former group—the truth-telling veterans—will advise that, as in life more generally, there’s no certainty in markets. Instead, there are only ways of mitigating risk.
The great American financial historian Peter Bernstein was one of the truth-tellers, warning people that—even with the most powerful computers—no investment model could ever perfectly factor in every risk or the possibility that the previously unthinkable might become reality. “The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control…. and (where) the linkage between effect and cause is hidden from us,” he wrote.
Warren Buffett is another of the truth-tellers. Constantly asked for his economic and market outlook, the Sage of Omaha takes a deep breath and says speculation is pointless. “I don’t think anybody knows what the market is going to do tomorrow, next week, next month or next year,” Buffett told Berkshire Hathaway’s annual meeting in 2020, during the pandemic. “I know America is going to move forward over time, but I don’t know for sure.”
Addressing the question of risk on another occasion, Buffett said the flipside of uncertainty was the opportunity this presented to the long-term, disciplined investor: “An argument is made that there are just too many question marks about the near future. ‘Wouldn’t it be better to wait until things clear up a bit?’ Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Another champion of investment humility is the renowned consultant Charley Ellis, who founded Greenwich Associates in the early 1970s. Ellis’s view, expressed in his book Winning the Loser’s Game, is the futility of seeking to outguess the market.
“The best way to achieve long-term success is not in stock picking and not in market timing and not even in changing portfolio strategy,” Ellis said. “Sure, these approaches all have their current heroes and war stories, but few hero investors last for long and not all the war stories are entirely true. The great pathway to long-term success comes via sound, sustained investment policy, setting the right asset mix and holding onto it.”
None of this is particularly sexy. It doesn’t involve the promise of overnight success and it doesn’t conjure up images of heroic figures pitting their wits against the world. It involves old-fashioned virtues such as humility, patience, discipline and keeping a level head.
On the positive side, it also means that you don’t have to take falling markets personally, just as you shouldn’t claim rising markets as vindication of your investment smarts. Much as the media might suggest otherwise, investing is not a competition.
For individual investors, a good plan is one they can live with and that allocates their assets to maximize their chances of reaching their goals in their desired timeframe. Risk is managed through diversification, while attention is paid to costs and taxes. The portfolio should be periodically rebalanced as markets change and as needs and circumstances evolve.
No plan will be perfect. It can never encompass every risk. Outlier events can always occur. But risk can be managed, at least up to a point, and there are strategies to help us deal with events that no one saw coming, such as a financial crisis, a geopolitical event or a pandemic.
These simple truths were expressed most eloquently and concisely by the great Jack Bogle, the founder of Vanguard Group and one of the pioneers of index funds. “The greatest enemy of a good plan is the dream of a perfect plan,” Bogle wrote. “Stick to the good plan.”
Amen to that.
Robin Powell is an award-winning journalist. He’s a campaigner for positive change in global investing, advocating for better investor education and greater transparency. Robin is the editor of The Evidence-Based Investor, which is where a version of this article first appeared. Regis Media owns the copyright to the above article, which can’t be republished without permission. Robin’s previous articles include What’s the Plan, The Good Advisor and Death by Lifestyle. Follow Robin on Twitter @RobinJPowell.