The Inevitability of Change
If you gathered the greatest investors of our lifetime into one room, there would be plenty of things they disagree on. We know this because they actually put their money where there mouth is. And many of them utilize different strategies than each other.
Warren Buffett built one of the largest fortunes by identifying solid businesses, buying large stakes in those companies, and often holding those stakes for decades.
Ray Dalio had similar success by focusing on macroeconomics, global diversification, and understanding how various changes in the world affect different assets.
John Bogle believed most investors would be better off simply buying ‘the entire market’, essentially following the wisdom of the crowd.
Each built extraordinary track records with very unique strategies that have stood the test of time. And there are more schools of thought than just those 3.
That should make all of us pause. Maybe there is more than one way to peel a potato. And maybe our existing opinions aren’t the only ones to consider.
Most people struggle with these lessons, including myself: … Turning Overconfidence into Humility, Being Aware of Our Biases, and Challenging Our Existing Beliefs.
We naturally seek evidence that confirms what we already believe. Once we become convinced of a specific philosophy, our brains begin filtering information through that lens. We notice the articles that support our beliefs. We follow experts who think like we do. We dismiss opposing viewpoints.
And if we see some success, we reinforce our opinions even stronger.
Sometimes our successes can be attributed to skill. Or maybe it was luck, randomness, or a favorable environment, or some combination of other factors. How do we know what the reason was?
We often hear: “I’ve owned nothing but the S&P 500, and it’s done great. Why would I ever own anything else?”
That conclusion feels logical. It has some historical merit, and to many people, it seems like it will continue to be true.
The S&P 500 has produced exceptional returns. But remember the disclaimer that exists throughout the financial industry: “Past returns do not guarantee future results.”
A strategy that succeeded over one period doesn’t automatically make it the best strategy for every period that follows.
History is full of examples where market leadership changed dramatically. There have been decades when international stocks outperformed U.S. stocks. Periods when value stocks dominated growth stocks. Times when commodities, bonds, or small companies carried portfolios while large-cap U.S. stocks struggled.
And most people make the change from one to the next AFTER it’s too late to get the real benefit.
Technology changes. Interest rates change. Governments change. Tax laws change. Demographics change. Business fundamentals change.
Beyond that, the performance of assets is also influenced by millions of human decisions made every day under conditions of uncertainty.
- Fear.
- Greed.
- Optimism.
- Panic.
- Innovation.
- Complacency.
Real financial planning for real life.
Riverbend is a fee-only, fiduciary advisor. Our plans are personal, shaped by your values and designed to help you build a full life.
Who We AreSo we aren’t just betting on the success of the companies we invest in, we’re also betting on how people already feel about those investments, AND how they will feel about those investments in the future. Expectations and emotions can matter just as much as fundamentals over any given timeframe.
How confident can any of us be in the emotional stability of everyone else?
And to make it more complex, there are risks that most people are simply unaware of. No one consistently knows which risks will matter most next though.
Buffett keeps enormous cash reserves despite criticism that cash drags performance.
Dalio diversifies across asset classes designed to perform under different economic conditions because he assumes he cannot reliably predict the timing or the severity of those conditions.
Bogle constantly taught that there are too many moving parts to keep track of, and the market as a whole will do a better job than any individual will.
There is merit to all those approaches.
They each take different action steps, but they all share in the skill of embracing humility.
We can all start down that road by spending more time trying to prove ourselves wrong rather than seeking information that supports what we already believe.
The future may look very different from the recent past.
Our current approach is going to have imperfections.
The world is more complicated than our individual world view.
Change will come, and that’s ok. We can be ready for it even if we can’t know exactly how it will look.
