The majority of the financial industry is built on the proposition “if the investor just had better info, he/she/they would make better decisions”. Think about it: financial media, newsletters, online brokers, — hell, CNBC’s Cramer has built an entire platform on it. It’s a big lie. Investors want to believe this because it is empowering. The financial industry wants to sell it to us because it is enriching and aggrandizing. But it’s wrong.
It’s not lack of information that holds us back. The binding constraint is emotions. This doesn’t mean information is not good. It is good, but only AFTER you’ve got your emotions harnessed. And very few of us have.
Hubris when things are going well, paralysis by analysis when they are not, impulsiveness when things are moving fast, impatience when things are really, really slow. This is a partial list of the behavioral shortcomings that make us suckers.
Most importantly, you, YES YOU, are not exempt from these flaws. This includes me too.
The difference between ‘you’ and the pros is that the pros have built systems to keep these demons in check (mostly)—whether they are conscious of it or not (Pros are incented to succumb to the self-aggrandizing belief that their superior intellects and info is their replicable “edge”. Also, selling this line helps them hang onto assets when performance flags).
Portfolio construction, sizing, stop losses/profit targets, technical analysis, asset allocation models, rules, decision by committee, all of these things reduce the frequency with which emotions slap us and take our lunch money.
Individual investors would add more value to their own portfolios if focused on building an investment approach that mitigated emotional impulses. Until this is done, ain’t nothin’ gonna work.
(The original Big Lie is the one called out by Barry Ritholtz: “..banks and investment houses are merely victims of the crash. You see, the entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage or misguided compensation packages, but rather long-standing housing policies that were at fault”.)