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April 9, 2014

Jonathan Tobin: Why Did Kerry Lie About Israeli Blame?

Samuel G. Freedman: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Jessica Ivins: A resolution 70 years later for a father's unsettling legacy of ashes from Dachau

Kim Giles: Asking for help is not weakness

Kathy Kristof and Barbara Hoch Marcus: 7 Great Growth Israeli Stocks

Matthew Mientka: How Beans, Peas, And Chickpeas Cleanse Bad Cholesterol and Lowers Risk of Heart Disease

Sabrina Bachai: 5 At-Home Treatments For Headaches

The Kosher Gourmet by Daniel Neman Have yourself a matzo ball: The secrets bubby never told you and recipes she could have never imagined

April 8, 2014

Lori Nawyn: At Your Wit's End and Back: Finding Peace

Susan B. Garland and Rachel L. Sheedy: Strategies Married Couples Can Use to Boost Benefits

David Muhlbaum: Smart Tax Deductions Non-Itemizers Can Claim

Jill Weisenberger, M.S., R.D.N., C.D.E : Before You Lose Your Mental Edge

Dana Dovey: Coffee Drinkers Rejoice! Your Cup Of Joe Can Prevent Death From Liver Disease

Chris Weller: Electric 'Thinking Cap' Puts Your Brain Power Into High Gear

The Kosher Gourmet by Marlene Parrish A gift of hazelnuts keeps giving --- for a variety of nutty recipes: Entree, side, soup, dessert

April 4, 2014

Rabbi David Gutterman: The Word for Nothing Means Everything

Charles Krauthammer: Kerry's folly, Chapter 3

Amy Peterson: A life of love: How to build lasting relationships with your children

John Ericson: Older Women: Save Your Heart, Prevent Stroke Don't Drink Diet

John Ericson: Why 50 million Americans will still have spring allergies after taking meds

Cameron Huddleston: Best and Worst Buys of April 2014

Stacy Rapacon: Great Mutual Funds for Young Investors

Sarah Boesveld: Teacher keeps promise to mail thousands of former students letters written by their past selves

The Kosher Gourmet by Sharon Thompson Anyone can make a salad, you say. But can they make a great salad? (SECRETS, TESTED TECHNIQUES + 4 RECIPES, INCLUDING DRESSINGS)

April 2, 2014

Paul Greenberg: Death and joy in the spring

Dan Barry: Should South Carolina Jews be forced to maintain this chimney built by Germans serving the Nazis?

Mayra Bitsko: Save me! An alien took over my child's personality

Frank Clayton: Get happy: 20 scientifically proven happiness activities

Susan Scutti: It's Genetic! Obesity and the 'Carb Breakdown' Gene

Lecia Bushak: Why Hand Sanitizer May Actually Harm Your Health

Stacy Rapacon: Great Funds You Can Own for $500 or Less

Cameron Huddleston: 7 Ways to Save on Home Decor

The Kosher Gourmet by Steve Petusevsky Exploring ingredients as edible-stuffed containers (TWO RECIPES + TIPS & TECHINQUES)

Jewish World Review

Monkeys and investing

By Morgan Housel





Who should try to beat the market?


JewishWorldReview.com | Benjamin Graham is the father of value investing. He literally wrote the book on how to analyze a company's value and pick superior investments. Warren Buffett once said, "I really learned all I needed to know about investing" from Graham's book, "The Intelligent Investor."

But Graham gave an interview shortly before his death in 1976 that calls his own ideas into question. Asked whether he advised selecting individual stocks to beat the market, Graham replied:

"In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook, 'Graham and Dodd,' was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost."

This took me aback. There is exponentially more research being conducted today than there was in 1976. If Graham was skeptical about buying individual stocks then, what would he be doing today?

I had lunch with Wall Street Journal columnist Jason Zweig this week. Zweig wrote commentary and footnotes in the latest edition of "The Intelligent Investor" and is more familiar with Graham's thinking than almost anyone.


"Would Graham have all of his money in Vanguard index funds if he were alive today?" I asked.

"No, I don't think so," Zweig said.

Instead, Zweig thinks Graham would have advised those who have an edge at stock-picking to do so, while recommending those who don't take a passive approach with index funds. "He would advise knowing your advantages and your disadvantages, and not playing a game you have no advantages in," Zweig said.

This seems obvious, but too many investors fail to ask themselves honestly whether they have an advantage, and if so, what it is.

Fewer investors have an advantage than think they do. The reason is simple: Luck skews our perception of how skilled we are.

I have no medical experience. If you put me in an operating room and told me to perform open-heart surgery, the odds that I could do so successfully are exactly zero percent. Same with building a skyscraper or sequencing a genome. Those without skill in these fields will fail 100 percent of the time, so most don't bother trying.

Investing is different. Give a monkey $1,000 and a brokerage account, and the odds are decent -- about 50/50 -- that he will make money in the short run. He may even beat brilliant professionals. In his book "The Success Equation," Michael Mauboussin writes that the best way to determine whether an activity involves skill or luck is to ask if you can lose on purpose. In short-term investing, you probably can't. There are short-only hedge funds whose goal is to pick losing stocks. Most can't do it consistently. Few other fields are like this.

Short-term luck deludes hordes of investors into thinking they can beat the market when they stand little chance of doing so. Over the long run, luck erodes and true investment advantages shine through. And the results are clear: Most investors do not have an advantage. The majority of those who try to beat the market end up underperforming it.

This got me thinking: What is my advantage as an investor trying to beat the market?


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I think it's simply time. I'm patient to the point of obsessive when it comes to delayed gratification. I bought stocks all the way down in 2008 and 2009, dreaming about what they'd be worth in 2038 and 2039. That's a big advantage over Wall Street, whose definition of "long-term" is the time between "Lightning Round" segments on CNBC. If Wall Street is thinking about the next ten months, and you're thinking about the next ten years, case closed -- that's your advantage. Last year, I asked Rob Arnott, a pioneer of index investing, if anyone should pick stocks. To my surprise, he wasn't against the practice. "It's also not necessarily all that hard, because Wall Street is now so obsessed with short-termism that long-term value doesn't matter to the decisions of vast throngs of institutional investors," he said.

Time can be the only advantage necessary for an investor focusing on index funds or wide diversification. If you're picking a smaller number of individual stocks, you need an advantage there, too.

Entire books can (and have) been written on how to gain an advantage picking individual stocks. It's not a topic for one article. But if there's a common denominator of successful strategies, it's thinking about investing in businesses, not stocks, and believing strongly in the concept of reversion to the mean.

My colleague Ron Gross says we should think of the market as a company market, not a stock market. Doing so can change your thinking 180 degrees. Most people understand that businesses will have a bad quarter or a rocky year once in a while. It's a normal part of being a business. But those same people tend to react to a bad quarter in the stock market as a harbinger of doom that should be avoided at all costs. That causes all kinds of bad behavior. Shifting your thinking ever so slightly to asking the question "Is this a good business?" instead of "Is this a good stock?" alone can be an investing edge, since so few investors do it. It focuses your attention on having an ownership stake in a business's future profits, which you can do, from trying to predict the madness of the stock market, which you can't.

Faith in the concept of reversion to the mean can also be an advantage. As investor Dean Williams put it, reversion to the mean is the simple idea "that something usually happens to keep both good news and bad news from going on forever." After booms come busts, and after busts come booms. Above-average valuations are followed by below-average results. This story repeats itself again and again throughout history. It's simple stuff, but it's one of the most powerful forces in finance because, by definition, only a small portion of investors can be contrarians. It's much easier to say "I'll be greedy when others are fearful" than to actually do it. But those who truly can train themselves to be skeptical of outperformance and attracted to underperformance will likely do better than most. They have an advantage.

What matters is that you know what your investing advantage is. Can you articulate your advantage? Are you being honest with yourself when assessing it? If not, think twice about trying to the beat the market. Passive index funds can be a great alternative. I think Ben Graham would agree.

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Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review.


Previously:


Two types of risk, two types of bubbles

The secret to financial success: Use ignorance to your advantage

How to effectively fight investors' greatest enemy

Four mistakes that make everyone a bad investor

Learning from the past, and the Next Big Tren

What newspapers were saying when you should have been buying

Why you never learn from your investment mistakes

The curse of success, and why most mutual funds fail miserably

If you know only five things about investing, make it these

Why spotting bubbles is so much harder than you think

When smart investors do stupid things

The deep downside of home ownership

The biggest retirement myth ever told

He's rich, smart and old: Listen to him

Admit it: No one has any idea what's going on

Gold collapse: The start of something big?

BAD NEWS: EVERYONE IS RIGHT!

Twitter: The carnival barker of investing

Warning: Don't waste your capital being fooled by profit prophets

25 important things to remember as an investor

New paradigm for both drivers and car companies

Biases that make you a bad investor

Nine financial rules you should never forget

Gaining from financial destruction

How to read financial news

Housing: Partying like it's 1925

A rebuttal to student loan horror stories

CONGRATULATIONS: We just saved half a trillion dollars

End this crazy tax: It will boost the economy

Medicare: A dangerously good deal

Economic future looks bright

The Biggest Threat to Your Portfolio (It's Not What You Think)

Bond Market Bull Run dead at 30



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