Friday, August 27, 1999

Be Thyself Or Be An Idiot


I couldn't resist responding to last week's "The Motley Idiot" Fribble because it demonstrates what the average investor should not do but unfortunately does so often. I have had a great deal of experience at watching investors (not to mention myself) screw up over the years. That is because I am one of those hearty souls who courageously took up a heretofore honorable profession that now reminds most investors of ambulance chasing lawyers and used car salesmen. You guessed it, I am a (gulp) broker. OK, you can stop reading now if you must.

I read a fascinating study a few years ago. It was done for Morningstar, the group that sells information on mutual funds. From 1984 to 1994, a random sampling of 200 mutual funds averaged 12% per year. Didn't come close to the Dow Dogs or an index fund, but if you just hung in there, after 10 years, you were still up over 300%. Things could be worse. Unfortunately, many investors tried to improve their performance by switching in and out of these funds based either on timing considerations, or by trying to grasp at the newest hottest fund. Those investors averaged 2% a year for the same 10-year period. Now, they needed a good broker.

This is anything but a condemnation of the average investor, either. It's just the way people generally react to the market. They get excited and buy, or get depressed and sell. One of the best things about The Motley Fool is that it is anything but dogmatic. There are a number of choices you can make that are all valid and are all likely to be successful over time. If you don't have the temperament to hold Microsoft through its ups and downs for the next 30 years, don't try to. Before you enter any investment program you had better check out the risks, and decide whether you can handle them. The aforementioned "Motley Idiot" obviously hadn't, or he would have known he should have left the Rule Breakers alone and stuck to Spyders all along.

Let's take a look at that: if there had been a Rule Maker or Rule Breaker portfolio back in the late 1960s, how many of us could have held onto IBM for 20 years before it made another new high? I know I wouldn't have. One look at a M.C. Horsey "25 Year Picture" (a great chart book) disabused me of any notion that I could ever personally invest in a portfolio that tried to pick stocks you never sold. I saw too many that went from the stratosphere to the feeding trough -- or worse yet, became nonexistent.

That's one of the great things about an index. The portfolio is culled of its losers automatically. As are the Dow Dogs, and any number of other "workshop" portfolios we can Foolishly choose. I found I could use the principals of Rule Maker and Rule Breaker ports or some of the other portfolios in making my Foolish stock choices. So can you. But I don't trust my ability at stock picking to even think of holding forever.

What's a Fool like me to do? For me, it was simple: Stay away from those portfolios that I know would drive me nuts and stick with what I know I can (and will) do. If I am not comfortable with the approach, and I try it anyway, experience has taught me that Murphy's Law will soon rear its ugly head. It will probably pay a visit anyway, so why not enjoy your investment concept while you can? Personally, I like making a bet that GM won't go bankrupt or cut out its dividend in the next 12 months. It makes me happy. I also like taking some of the optimization ideas of other portfolios and applying it to the Dow approach. I like the Dow! But that's a different Fribble.

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