You may recently have read the outstanding, in-depth article from Sports Illustrated “Sports Genes,” by David Epstein, who points out that “good genes” don’t necessarily equate to athletic success. Take Ethiopian runner Haile Gebrselassie, the world-record holder in the marathon and perhaps the greatest distance runner ever, who, at age five, ran six miles each way to school because that’s how you got to school in Ethiopia. “Every day is running. Every job is running: working in the fields or just getting somewhere. Life is running,” says Gebrselassie.
Just as Gebrselassie wasn’t born a world-class runner, you probably weren’t born great at your chosen profession. Chances are, your life was dedicated to working to support your family, and you got good at what you did. Investing in you was your greatest investment. Now, as retirement beckons, you want to keep what you’ve made. Yet great investing comes from a lifetime of dedication, not just part-time or on weekends. In addition, the average investor, or John Bull, tries to do too much. Charles Kindleberger writes in his classic Manias, Panics, and Crashes: A History of Financial Crises, “John Bull can stand many things, but he cannot stand 2 percent.”
A life of investing gives you seasoning others may lack. Take stop-losses as an example. In theory, a position is sold when a stock falls to a specified level, locking in gains. Stop-losses sound good on paper until the unexpected occurs, like the May 6 flash crash that triggered a machine-gun-like tat-tat-tat-tat-tat of executed stops. Those who forfeited their positions may have been too gun-shy to get back in, and missed out when the market rebounded the following week. My advice is not to play around with stops. Simply have the right amount of money in bonds and you won’t be faced with having valuable dividend-paying positions prematurely sold.
A life of investing gives you an eye for what’s important and what’s not. In a groundbreaking study, “Valuation-Indifferent Weighting for Bonds,” Robert Arnott compares bonds in a typical market-weighted 500-bond index to his composite based on companies’ assets, dividends, cash flow, and sales for the period January 1997 through December 2009. Compared to the performance of an index of investment-grade corporate bonds, his composite outperformed by 0.40% per year. And of the four metrics, is it any shock that dividends had the greatest positive impact on returns by over half a percent per year? That’s a significant margin.
If your life hasn’t been dedicated to investing, there’s little reason why you should be a great investor. Sometimes success can be falsely credited to genius, or “good genes,” and not the everyday effort of a life’s work.
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