Robert Shiller, a professor of economics at Yale University, shares advice about investing he learned in graduate school.
One needs to think antisocially to excel in investing, to resist the patterns of thinking that seem mysteriously to arrive simultaneously in the minds of millions of people around the world. People do not trust their own judgment but go along with the crowd, even when they can see truth.
It’s tough to take a contrary view point. First, it’s easy to believe that “a million people can’t be wrong.” The “wisdom” of crowds may be valid for some things, but usually not investing decisions. When the rest of the world is selling, it is probably a good time to buy. And vice versa.
Second, the media make it easy to get confused. mass market hype will trend in one direction, while a bevvy of financial reporters in a small segment of the media will unanimously vote in the opposite direction. Which trend should you buck?
The smartest advice I ever got, CNN Money, July 22, 2008
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I think he’s right. It’s like when people watch shows like Mad Money and run with a stock tip that Bill Kramer makes. Automatically, they’re buying at a premium because others also follow the same advice.
I think the key is to establish formulas and numerical guidelines that make sense. Then stick to them regardless of what you read or what other people are doing. I slowly ramp up the percent of my 401K in bonds as I get older, (in a linear fashion). I rebalance frequently to track these guidelines closely. So when my stock mutual funds tanked, I was buying. When I get too far out of whack, I sell and put that money into bonds for a subsequent stock market decline. It’s nothing more than rebalancing with a formula in mind, not just by the calendar.
I wonder how many people say they’re going to rebalance once a year but don’t do it due to fear of further market declines?
I reached a similar conclusion from watching the coverage, and early lack of coverage, of this credit crisis. It seems that no one knows what they are talking about, and that my own ignorance makes me just as qualified as anyone else. I was proven at least a little correct when I started comparing my 401k distributions and returns with some of my co-workers who paid for professional financial advisers for help. I’m doing better than they are.
At first, I succeeded by luck, but when I started reading on the subject and doing my own research, I found out why my good picks are good, and why my bad picks were bad. It all makes some sense, and now I research everything and I’m doing OK.
At first, I was just too cheap to pay a planner, but if I followed the crowd at my office I’d have bad funds, and just shrug my shoulders when the news says the economy is bad because that’s just the way it is. I would be worse off while my financial adviser and 401k company would be doing just fine.