Wall Street's Complexity versus Investors' Profits & Simplicity
Wall Street's
Complexity versus Investors' Profits & Simplicity
“Any darn fool can make something complex; it takes a genius
to make something simple.” -- Pete
Seeger
As a long-time trader, I am living breathing proof that
simplicity and profits are positively correlated while complexity and profits
are inversely correlated. In other
words, as my 25 year investing career has jettisoned multiple methodologies and
numerous indicators, my profits have became more regular and predictable while
my losing ratio has diminished. This is
the absolute antithesis of what Wall Street wants you to believe.
Wall Street lives and breathes on complexity. They pitch derivatives of every variety and
alternative funds for specific self-serving reasons.
1. They want to
convince investors that it’s far too complicated for them to manage their own
money – therefore, the wisest decision is for investors to just give it to Wall
Street managers instead.
2. They try to
assure you that with this complexity come “insider” rates of returns and big
profits. But then can you explain to me
why so many university endowments and retirement funds are closing out their
hedge fund positions? Because the returns have not justified the
risks, losses and complexity.
3. Wall Street
loves to use the cliché, “you get what you pay for” as justification for higher
fees. So then, can you explain to me
again why so many academic studies have concluded that no load mutual funds
outperform advisor-recommended loaded mutual funds? The fact is that investors often do not get
what they pay for.
The catalyst for this week’s rant is that I cleaned out a
closet with my old trading binders from over 20 years ago and was stunned by
two observations. The first thing I
realized was that I had been so vulnerable to believing Wall Street’s siren
song of complexity. The second thing was
that it was obvious my trading methodology back then was unnecessarily
complicated.
To most individual investors, it seems counterintuitive when
I preach my doctrine of simplicity, but it is precisely this simplicity that
empowers you to outperform the professional money managers. Layer on top of that my other sermon that no
one will manage your money with the same passion and commitment as you yourself
and you have the magic ingredients for achieving consistent success as a stock
market investor.
Wall Street is based on its own version of Yin & Yang as
opposites and contrary forces are actually interconnected and interdependent. In simplest terms, the market is made up of
buyers and sellers, load and no load funds, passive and managed
strategies. The complexity and
simplicity paradigm is just another example.
Much like life, one must decide to embrace the light or the dark, the
hot or the cold, the high or low. So
too, as an investor, you must choose between the dichotomies that Wall Street
offers you.
I am simply sharing the experiences of my own journey as an
investor. As I embraced the mantra of
simplification in my investment methodology and my trading tools, my net worth
grew. My relatively small basket of 10
technical indicators and the Tensile Trading approach that I’ve written so much
about are living testimonials to this mantra.
Albert Einstein famously said, “If I had one hour to save
the world, I would spend 55 minutes defining the problem and five minutes
implementing the solution.” If you were
in a life threatening situation and had only one hour before it proved fatal,
what would you do? Einstein said he’d
spend his time wisely asking probing questions to understand the problem in
depth. Having done that, he’d only need
5 minutes to address the issue.
Many new investors I meet in my classes totally flip around
Dr. Einstein’s approach. They have an
unstoppable inclination to jump right into the market, metaphorically
speaking. They’ll trade impulsively for
the first 55 minutes and then allocate the last 5 minutes trying to figure out
what just happened.
Humor me, please. Just
go with this. Place your hands on the
table, turn down the lights and let’s invite Albert Einstein to our séance to
give us his advice. If it was indeed
possible to “channel” him, I suspect he would suggest approaching the market’s
first 55 minutes more like this:
You have accumulated certain assets. Ask yourself if they are safe. Dr. Einstein would challenge you to address
asset protection, first and foremost.
Issues such as insurance, estate planning, identification theft, tax
planning, record keeping and the like.
You have to secure what you’ve got.
Next, he would ask if you had thought through personal money
management questions and committed yourself to a personal trading plan in
writing. It’s shocking how few investors
actually do this. Einstein’s objective
here would be to make certain you grasp the full scope of the problem.
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