The first principle to investing is to “buy low and sell high.” If you’ve ever tried to construct a portfolio at a time when the investment markets, as a whole, are declining you’ve found this principal to be extremely hard to implement in real time.
A lot of things in life are simple and, at the same time, hard. Riding a bike is simple: jump on and pedal. But when you first tried it you probably thought it impossible.
Conventional money management has been challenged in recent years by the increased frequency in which information is shared. One hundred years ago information was slow to be delivered. The means in which people communicated required time. Today, whether it be a text message to a friend or a twitter post, time is no longer a requirement to deliver any message to anyone.
If information is what allows an investor to decide what to invest in. And each investor has to sift through the roughly 14,000 stocks that are traded globally in order to find the few that are going to do the best. How can an investor reliably be able to not just get all the relevant information about those stocks instantaneously moment to moment, but also be able to translate all that information into how it’s going to affect all of the prices of investment options available?
The answer? I believe it’s impossible. I am not even sure a computer can even do it since it requires being perfect on predicting human behavior. Not to mention the ability to predict what interest rates are going to do, what inflation will be, along with hundreds of other variables that play into the price of investments moment to moment.
In comes the few approaches left in the realm of investment management: active investing to manage risks, rather than maximize returns, or passive management. Passive management seems to have two camps. The first is buying indices and letting the returns be dictated by the index you chose. The second being where portfolios are constructed to get the largest investment exposure but more heavily weighted towards investment types that carry some consistency on outperforming other assets classes over time.
If all of this sounds like Greek to you, that’s okay. I wrote this article in hopes that you’ll get the gist of what I am saying to recognize that investing can be hard to do but, in fact, is simple. “Buy low and sell high.”
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