Start Investing Principle #1: Monkey See, Monkey Do

Start Investing: Principle #1 - Monkey See, Monkey Do

Often times, “investing” brings to mind a hazy shroud of complex terminology, math-sounding jargon, and expertise-only signage posted around our mentally-created chain-linked fence. And that is the way “they” intend it to stay. Because if you and I walk too close to the entrance of said chain-linked fence and begin to inspect the master lock, we will quickly realize – to our astonishment – that the lock is open!

As with many fences we pass by in everyday life, the appearance of impenetrability keeps people away 99% of the time. But we are the 1%, the door-knockers. And today, to kick off our Start Investing series, we need to walk up to the fence entrance; because what we will find is quite shocking.

Derivatives, margin, triple-leveraged ETF, butterfly, covered calls, CDO’s, CDS’s, CD’s, BTO’s – all of these make up just a sliver of the technical terms from the Financial Instruments playbook. Few people know, however, that it is chock-full of defensive plays designed to render the offense of our investing intellect ineffective.

But why?

Mostly due to one idea: job security. Because if you and I are able to peel back the green curtain, we too will find that the man inside is desperately working to keep the projection of inapproachability alive.

Thanks, Toto!

Because if we don’t peel back the curtain of jargon and technical finance words, then we still feel that helpless desire to only handle our finances with the aid (read: paid services) of the “professionals”*. Simply put, the more we learn about investing for ourselves, the less we need said professionals; and the less we need said professionals, the less demand and, subsequently, the less pay they will receive. And the less we need the professionals, the more we save!

*I don’t intend to say that this idea be exclusive to the financial sector, because there are many, many services for which we pay due to lack of knowledge (some merited, many not). But this is for another post at a later time.

So how do we back this idea up and peel back the curtain? For starters, let’s look at one of my favorite quotes from one of my favorite investing books.

“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

-Burton G. Malkiel, A Random Walk Down Wall Street (Tenth Edition)

In his book, Malkiel, a Princeton University professor, shares the shocking results from his research team’s studies that 98% of these monkeys’ dart-throwing abilities outperformed the experts’ selection. What?!?!? Elaborating on this in more detail, Malkiel drives home the fact that NOBODY (not even the experts) can consistently outperform the market when it comes to investing. And this brings us to our very first investing principle:

Principle #1: Due to market efficiency, nobody can – with 100% certainty – consistently expect to greatly outperform the market.

Don’t be worried, however; this principle is both sobering and liberating. Because this idea unshackles us from the assumption that the “experts” are the only ones that should handle our investments; and, in turn, equips us with the knowledge and confidence that it is well within our propensity to successfully manage our investments with the same (if not higher) degree of certainty.

And it is with this understanding that we grab hold the tassels of that green curtain. Let’s continue to peel it back.




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