The Best Investing Advice You’ll Never Take

Last week, we took part in an ‘Ask Me Anything’ session related to our latest book, Hormegeddon, on social news site Reddit.

The format — the public writes in with questions and the interviewee (your editor in this case) answers them in ‘real time’ — was new to me. So, many thanks to all those who tuned in. And many more thanks to all those who had cheerful words of encouragement.

One of the questions to come to us yesterday: What happened to our old, tattered ‘Crash Alert’ flag?

The answer is we had to take it down. The ol’ Black ‘n Blue flag had been up for so long — battered by wind, rain, sun…and trampled by stampeding bulls — that there was barely anything left of it.

It was becoming embarrassing. But it should be flying high again now…warning of the danger of a surprise bear market.

October is coming. And according to one of our favourite economists, Richard Duncan, the risk of heightened volatility is rising…as excess liquidity disappears from the marketplace. Beware.

Unanswered questions

Now, let’s continue with our look at how you should invest in a world of ignorance and irrationality.

There are many unanswered questions:

Should you put your money in a company just because you like the product?

Should you buy companies with rising earnings?

Should you trade in and out of stocks?

What should you do if the market is ‘too high’?

Should you be trying to beat the market at all? Is it not better to content yourself with whatever the market returns?

The answer to these questions will be far more important than any stock pick you ever make.

We want to publish research not just about what to invest in and when to invest in it… but how you should be investing in the first place.

First, consider this from Forbes:

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames. The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!

The average investor exclusively investing in just fixed-income funds has had an even worse experience. The annualized return is 0.6% over 10 years, 0.7% over 20 years, and 0.7% over 30 years. Investors may only have themselves to blame.

According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotion.

By contrast, almost any investment sector or category did better. Over the last 10 years, the S&P 500 rose 7.4%. International stocks rose 6.9%. Bonds went up 4.6%. Only commodities underperformed, with a negative 0.8% annual return.

Is the market "efficient"?

Academics and financial theoreticians have confronted these facts in the context of the Efficient Market Hypothesis (EMH).

The evidence, say EMH advocates, supports the hypothesis: There is no point in trying to beat the market. You won’t win.

‘Nothing of the sort,’ reply EMH critics, among them Warren Buffett. There’s plenty of evidence that: (1) irrational investors frequently misprice stocks in an exploitable way, and (2) investors using old-fashioned Graham-and-Dodd value investing techniques consistently beat the market in a way that is not attributable to luck.

More evidence on this point came yesterday. Our old friend and colleague Chris Mayer — and another disciple of Graham and Dodd — had the track record of his value-investing newsletter Capital & Crisis verified by outside auditors. Chris writes:

The report is not perfect. They exclude dividends, which is ridiculous.

But even so, from September 2004 through July 31, 2014, the annualized return for Capital & Crisis were 16% over the last decade versus 4.8% for the S&P 500.

I count dividends, so my figures are a touch higher – 17% for Capital & Crisis. But pretty close.

So you see, you can ‘beat the market’.

But as we pointed out Friday, both EMH advocates and detractors exaggerate.

It may be true that prices are never ‘perfect’…in the sense that they perfectly reflect the real value of the underlying investment. But it is also true that investors can never be sure they have discovered a more perfect price than the market has set.

In other words, Mr Market is never wrong; he just changes his mind.

A moral rule

For us, the EMH is better regarded as a moral rule. It is not exactly true. But it is not exactly false, either.

A savant such as Warren Buffett would be a much poorer man today had he believed it. But most investors are probably better off taking it as gospel…just as they are better off believing they will go to hell if they disobey the Ten Commandments.

For most investors, riding along with the market will be far more rewarding than trading in and out trying to beat it. There may be $100 bills lying around from time to time, but most investors probably won’t find them before Buffett and other pros like him do.

This is the approach we take at our family wealth advisory, Bonner & Partners Family Office — where the main focus is on asset allocation, not stock picking.

The core message of EMH is that the market is very hard to beat in a consistent way. It tells us to be humble…and realistic about what we can expect from stocks.

For most people, investing is not a good way to make a fortune. It is just a good way to keep…and maybe grow…a fortune.

You make your real money by providing real goods and services to others. It is not realistic to think you can make much money, while you sleep, from the hard work and enterprise of others.

That is revealed in the figures above cited by Forbes.

Our investment philosophy

Another way to look at this is to think of investing as a ‘losers’ game’.

A successful amateur investor realizes he is not likely to beat the pros. He doesn’t try for home runs or grand slams. He just wants to get on base.

He assumes the market is fairly efficient…and that he’s not likely to beat it. He avoids buying expensive stocks. (How does he know they’ll continue to go up?) He avoids investment themes he doesn’t understand. (How does he know they make sense?)

He aims only to not lose, by sticking with the very, very basics.

That is the point of the Simplified Trading System (STS). We’re not trying to find things that will work. (How do we know?) We’re just trying to identify those that probably won’t.

Here’s our investment philosophy:


Think a lot. Do a little.


Always buy low. And for safe measure, buy very low.


Never believe anything a salesman says about an investment. There’s a good chance that he is ignorant, dishonest or stupid. Or all three.


Be reasonable. But take a swing at a grand slam pitch from time to time. Heck, it’s not just about the money; it should be fun, too.


Remember, the investment world is like the rest of life. Patience, modesty and hard work pay off. Vanity, weakness and cupidity do not.


Bill Bonner
For Markets and Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money