Hi Guys,
Investing need not be difficult to understand although execution is often a daunting challenge.
In considering the understanding phase, I especially admire Carl Richards simple napkin sketches as a way to nudge novice investors towards a rewarding pathway.
Richards’ drawings have been referenced on MFO in the past. Even if some of his work has been discussed recently, I believe it is worthwhile to view a large body of his sketches en masse. It is not only informative, it is imaginative and sometimes just plain funny. Here is a Link to one such presentation that contains 27 of his drawings:
http://www.businessinsider.com/carl-richards-napkin-sketches-2013-9?op=1I apologize if Ted has already posted this fine summary article (he misses very little). I am particularly fond of the sketch (about number 9) that illustrates the potential negative savings of Costco customers with their addiction to the Costco gasoline pump. This is funny stuff with an embedded lesson.
Humor aside, Sketch number One is a devastating summary of the typical investor’s Wall Street experience. An endless parade of academic and industry studies again and again demonstrate the futility demonstrated by the pervasive number of investor’s who are perennially late to the party.
These studies date back to Cowles groundbreaking “Can Stock Market Forecasters Forecast?” study in 1933, include Terrance Odean asking if “Investors Trade Too Much” in 1999, and answering “Yes” using tons of data from a discount brokerage house, and annually add Dalbar’s Quantitative Analysis of Investor Behaviour Study due in late March to the expanding documentation.
These studies deploy different techniques to complete their analysis, some much more rigorous than others, but their bottom-line findings are very consistent, very persistent over time, and very disturbing. The investor population doesn’t claim a fair fraction of market rewards. Where are the investor yachts?
It seems that most investors arrive at the party after the snacks and drinks have been served, and, unfortunately remain until the financial police come to close the shindig down. Many reasons exist to explain why investors are so frequently late to the party.
I humbly suggest that Richards could improve his drawing by identifying some of the causes for the erosion illustrated by the second column of his Behavior Gap sketch. For example, he might show, with dotted lines, that a conservation of Investment Returns law, as shown in column One, is fully satisfied, as it must be. However, those rewards are now (column two) distributed to various wealth depleting drag factors.
I would rename column One as “Market Returns”. In column Two, these rewards are distributed to mutual fund total costs and underperformance, to mutual fund advisor fees, and to mutual fund investor bad timing proclivities. Data exists to illustrate the approximate magnitude of each erosive drag element.
This is a triple whammy that can reduce an investor’s share of the profits to one-third of what the marketplace produces. The investor can enhance his share by buying more wisely with an eye to reducing cost drains, and by eliminating optional fees.
From the classic Pete Seeger song “Where have All the Flowers Gone?” the refrain “Oh when will we ever learn, Oh when will we ever learn?” seems appropriate here. Today just might be that day.
Please enjoy Carl Richards’ fine napkin sketch portfolio.
Best Regards.
Comments
Regards,
Ted
Where Have All The Flowers Gone: Pete Seeger: