Saving Investors From Themselves

One of the smartest financial journalists I follow is Jason Zweig.  He isn't a media darling, but he's fairly well-known for writing a column for the Wall Street Journal, and he's also authored books and operates his own web / blogging site at jasonzweig.com.

I was looking at his blog archive recently, and came across a gem from three years ago called, "Saving Investors From Themselves."  He's writing about financial journalists, but he could just as well be writing about financial advisors.

Here's an excerpt -- if you don't want to read it all, at least read the last sentence.

I was once asked, at a journalism conference, how I defined my job.  I said:  My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself.

That’s because good advice rarely changes, while markets change constantly.  The temptation to pander is almost irresistible.  And while people need good advice, what they want is advice that sounds good.

In practice, for most of the media, that requires telling people to buy Internet stocks in 1999 and early 2000; explaining, in 2005 and 2006, how to “flip” houses; in 2008 and 2009, it meant telling people to dump their stocks and even to buy “leveraged inverse” exchange-traded funds that made explosively risky bets against stocks; and ever since 2008, it has meant touting bonds and the “safety trade” like high-dividend-paying stocks and so-called minimum-volatility stocks.

It’s no wonder that, as brilliant research by the psychologist Paul Andreassen showed many years ago, people who receive frequent news updates on their investments earn lower returns than those who get no news.  It’s also no wonder that the media has ignored those findings.  Not many people care to admit that they spend their careers being part of the problem instead of trying to be part of the solution.

My job, as I see it, is to learn from other people’s mistakes and from my own.  Above all, it means trying to save people from themselves.  As the founder of security analysis, Benjamin Graham, wrote in The Intelligent Investor in 1949: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics:  Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.

But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.

My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it.  I try to talk readers out of chasing whatever is hot and, instead, to think about investing in what is not hot.  Instead of pandering to investors’ own worst tendencies,  I try to push back.  My role is also to remind them constantly that knowing what not to do is much more important than what to do.  Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.