Getting good information
Even in the best of times, investing is such a dynamic and wide-ranging activity as to seriously challenge those committed to following it full time. For those who have less time and fewer resources the challenge can seem overwhelming. That doesn't mean your efforts can't be put to good use, though. A good place to start is to identify resources that can help you fill in gaps in your knowledge base and to avoid some of the problems that can prevent you from achieving your goals.
Training and experience
While information is far easier to come by today than years ago, the new challenge is sorting through the cacophony of self-serving viewpoints, conflicting claims, and half-truths. Unfortunately it can be hard to single out highly qualified investment professionals who do have the capacity to make such distinctions because the industry does not impose the rigorous requirements in regards to training, education, and certification that other professions, such as law and medicine, do.
In addition, significant direct experience with investing is essential for fully understanding the breadth and nature of risks and opportunities. Because the investment landscape is constantly changing, this endeavor takes intense curiosity and ongoing learning to keep up with. Most of the industry’s business models simply don't afford employees the time or resources necessary to establish a deep understanding of relevant issues. While active management is hard to succeed at, it does provide an indispensable window into the markets and their workings because it demands constant learning.
Conflicts of interest
It is always hard to get good, complete information from parties whose economic interests conflict with yours. Those who get paid on commission, regardless of how likable they are personally, will always have an incentive to omit or brush over important risk factors. When push comes to shove, they need to make money for themselves, not for you.
In addition, since many investment firms have an institutional bias to growing assets, they too often have a conflict of interest which diminishes the value of their insights to you. This conflict arises because in prioritizing asset growth, such firms have strong business incentives to provide overly optimistic investment views and to understate investment risks. These conflicts rarely become manifested in outright fraud; rather they typically just make it hard to get the "whole truth".
Further, as the proportion of money managed by third parties has ballooned over the years, so too has the potential for conflict of interest with asset owners, namely you. This problem is exacerbated by the fact that since conflicts of interest benefit the vast majority of providers, there are exceptionally few who have any economic incentive to change. The best way to mitigate this risk is to work with managers whose economic interests are most aligned with your own as indicated by substantial investment in their own fund(s) and in their own organization.
Biases and mental models
For all of us as human beings, we often rely on experience to guide us. This works most of the time but can fail miserably when our experience just happens to coincide with an historical anomaly. In these cases, the future can seem bizarrely different, even though it is perfectly consistent within the broader context of history.
This seems to be the case with US stock and fixed income returns since the early 1980s. Since this period comprises the majority of working history of most investors and investment professionals today, it often has a disproportionate impact on people’s impressions because of its recency and because of the positive emotions it evokes. In order to assess future risk and return potential as objectively as possible, the most avid investment professionals study a great deal of market history and investment theory.
Training and experience
While information is far easier to come by today than years ago, the new challenge is sorting through the cacophony of self-serving viewpoints, conflicting claims, and half-truths. Unfortunately it can be hard to single out highly qualified investment professionals who do have the capacity to make such distinctions because the industry does not impose the rigorous requirements in regards to training, education, and certification that other professions, such as law and medicine, do.
In addition, significant direct experience with investing is essential for fully understanding the breadth and nature of risks and opportunities. Because the investment landscape is constantly changing, this endeavor takes intense curiosity and ongoing learning to keep up with. Most of the industry’s business models simply don't afford employees the time or resources necessary to establish a deep understanding of relevant issues. While active management is hard to succeed at, it does provide an indispensable window into the markets and their workings because it demands constant learning.
Conflicts of interest
It is always hard to get good, complete information from parties whose economic interests conflict with yours. Those who get paid on commission, regardless of how likable they are personally, will always have an incentive to omit or brush over important risk factors. When push comes to shove, they need to make money for themselves, not for you.
In addition, since many investment firms have an institutional bias to growing assets, they too often have a conflict of interest which diminishes the value of their insights to you. This conflict arises because in prioritizing asset growth, such firms have strong business incentives to provide overly optimistic investment views and to understate investment risks. These conflicts rarely become manifested in outright fraud; rather they typically just make it hard to get the "whole truth".
Further, as the proportion of money managed by third parties has ballooned over the years, so too has the potential for conflict of interest with asset owners, namely you. This problem is exacerbated by the fact that since conflicts of interest benefit the vast majority of providers, there are exceptionally few who have any economic incentive to change. The best way to mitigate this risk is to work with managers whose economic interests are most aligned with your own as indicated by substantial investment in their own fund(s) and in their own organization.
Biases and mental models
For all of us as human beings, we often rely on experience to guide us. This works most of the time but can fail miserably when our experience just happens to coincide with an historical anomaly. In these cases, the future can seem bizarrely different, even though it is perfectly consistent within the broader context of history.
This seems to be the case with US stock and fixed income returns since the early 1980s. Since this period comprises the majority of working history of most investors and investment professionals today, it often has a disproportionate impact on people’s impressions because of its recency and because of the positive emotions it evokes. In order to assess future risk and return potential as objectively as possible, the most avid investment professionals study a great deal of market history and investment theory.
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