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Are you ready for the big game?
Super Bowl 50.
The seasoned star, Peyton Manning, in what could be his final game, versus the new star, Cam Newton.
The only improvement from my New England perspective would be watching our Patriots this Sunday, but I am sure I will enjoy the excitment on the field and off, with the TV commercials and halftime show.
Beyond the entertainment of the Super Bowl, the NFL runs a business that generates exceptional returns. If marketing is your game, you could do a lot worse than to follow the lead of the NFL.
In investing, we can also learn a lot from some NFL stars.
How not to invest.
Star players run up impressive records on the field, but many stories exist of even combined Heisman Trophy, College National Champion and Super Bowl stars like Tony Dorsett failing in finance (Cam, if you win Sunday, read here and don’t let this be you).
Some might think spending is the problem, and in some cases you would be correct. More often than not, however, professional athletes make the same mistakes as many other investors.
A good article on this was published in Forbes titled, How To Lose $20 million . In the piece, a top sports agent made the following quote: “What really gets these guys are not the cars, jewelry, or even houses, it is the big three – divorce, poor tax planning, and bad investments.”
I won’t make any comments on family issues, and I am not an accountant, but I will make a few quick comments on investing.
In our last post, Groundhog Day , I talked about the halo effect, which is a documented psychological bias we have to place confidence in people who are better known and deemed to be more intelligent, better looking, or more respected.
What marketing machine knows this well?
Wall Street
Evidence consistenly shows that low cost, boring, simple investments such as index funds often outperform more complex strategies, but our defenses are constantly rushed with CNBC spots presented by professionals with halos. In the morning someone might say “buy”, but in the afternoon someone might say “sell”.
It is no wonder studies show that the average investor significantly underperforms the market due to emotional selling or buying at the wrong time.
According to research from Morningstar, the 10-year return of the average balanced fund (mix of stocks and bonds) for the period ending 12/31/13 was almost 7%.
What was the average return of investors in balanced funds over this same time period?
Approximately 5%, which represents a gap of 2% on average per year for 10 years. The gap for investors in sector funds, which tend to attract more active traders, was even higher at over 3% on average per year for 10 years (click here for the full report and see the below chart).
So, why so much focus on new investing plays?
Just as exciting calls on the field drive sales of TV ads and profits for the NFL, transactions and new products quarterbacked by haloed investment managers drive Wall Street profits.
I am not a fan of market predictions, but I did recently go on the record with the following:
If you see the market continue to have a difficult time, you will see:
As I wrote about in Your Brain On The Market , if an investment coach is constantly recommending new schemes, especially during volatile times, “Just Say No”.
Next, as your own best general manager, consider firing the coach.
To help you defend again aggressive offensive moves, consider the following quote:
“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit. If I don’t, the transactional brokers and management complain. I then lose my job. I learned a long time ago that it pays to feed the Street.”
I heard this one night over dinner from the Global Chief Investment Officer of a large international wealth management firm. I got to know this person well over the years and even though it was his job to help pitch active investment strategies, ironically he often said his belief in investing skill was very low. What did he quietly admit was often the best choice for investors?
Index funds
Crazy you might say. Top investors don’t invest passively. They are active stars who have access to the best talent and top MBA draft picks. With their years of training and resources, surely they believe they can consistently post record stats.
Well, It has been my experience that many in the industry, especially off the record during halftime breaks with an adult beverage, consistently say the following:
“No”
What have a few investing superstars said on the record?
First, consider David Swenson, Chief Investment Officer of Yale’s Endowment.
Yale and other Ivy League schools might not produce as many NFL stars as my favorite SEC schools, but they do have some of the top endowment returns in the nation, and Yale consistently leads the way.
What does Swenson say in his book on personal investing?
“A serious fiduciary with responsibility for taxable assets recognizes that only extraordinary circumstances justify deviation from a simple strategy…”
You can read more on this in a piece that I wrote titled What Would Yale Do If It Was Taxable (yes, as Swenson and the NFL agent mention, don’t forget to factor in taxes).
Second, how about Warren Buffett?
A recent letter to Berkshire shareholders mentioned he has instructed the trustee of his estate to invest in a low-cost S&P 500 index fund. Buffett said at that time: “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very lowcost S&P 500 index fund.”
see Warren Buffett To His Heirs
Recently Buffet also gave the following advice on CNBC to the NBA star, Lebron James. “Everybody’s got an idea… [but] usually simplest is the best”
Buffett went on to say that athletes are often approached with investment ideas but that James should “just make monthly investments in a low-cost index fund” (click here to read the full story).
So, before rushing onto the investing field, consider taking a time-out.
Don’t get by getting caught up in Super Bowl type investing hype, and don’t make investing a competition.
Is winning really defined by outperforming the other guy or is it about reaching goals on behalf of your family?
To avoid getting sacked by Wall Street’s marketing blitzes, stick to your longterm game plan and consider following the advice of investing superstars such as Buffet and Swenson.
As they have said, the evidence is clear on how to consistenly produce goal winning investment scores.
Keep it simple and consider more index funds.