People often approach me at cocktail parties asking for my view of the investment climate and/or sharing theirs. While I go to such functions purely seeking to enjoy great friends, food and drink; I’m always happy to oblige.
To tell you the truth, cocktail talk almost always reveals one of the biggest investment mistakes on the planet: trying to be right. What do I mean? Well, these days, 24/7 news cycles can very effectively convince someone they absolutely know everything the need to about a topic when in reality they are viewing a whole lot of opinion and a very incomplete amount of evidence.
Case in point: last year, an acquaintance came up to me at a party and said he put $1 million in a bear market fund four years ago because he’s been absolutely convinced the stock market is going to collapse. He said it was now worth a mere $300,000 (this holding goes down when the market is going up and will only go up when the market goes down) but he’s convinced the market was going to collapse. Since the market is up over 15% since then, I’d estimate his $1 million investment (assuming he still has it) is now valued at $250,000 and he will need a 400% return from this point to get back to even. Ouch!
I’m not trying to make fun of this investor. While this is quite an extreme example, I see various forms of this same mistake made regularly by amateurs and pros.
One of my all time favorite investors, a gentleman by the name of Ned Davis, taught me the concept of investing to “make money” instead of “being right.” Simply put, it’s an approach that demands a constant look at the weight of the evidence and using it as a guide instead of developing an opinion and protecting it at all costs. This is what Evidence Based Investing is all about.
