At what cost?

Josh Brown has another great piece up this week he called “The Best and Worst Thing about Investing.”  I highly suggest you go read it.  In it, he dissects the difficulty of separating luck from skill in investing, the trouble with highly successful fund managers and the possibility that an amateur could, by luck or skill, beat the pros over a long period of time. As usual Josh is insightful and thoughtful on the topic.  And he finishes with this:

 But I submit to you that successful investing is a lifetime pursuit, and in the end, it’s the pursuit itself that offers the rewards along the way. The destination was never the thing – most of us aren’t meant to end up as Peter Lynch or Warren Buffett. No, it was what you learned on the way there that made all the difference. As the poet C.P. Cavafy reminds us:

Ithaka gave you the marvelous journey. Without her you would not have set out.

A lifetime of outperforming the markets is unattainable for most. But a lifetime of self-improvement and the acquisition of skill and knowledge – that’s available for anyone who’s willing to go for it.

I really do agree, in part, with Josh here.  The study of the markets and our behavior is an amazing thing and we can easily spend multiple lifetimes gaining and understanding of it all, from basic economics to behavioral finance to game theory, the information to be had is endless. As I’ve said before, I love the study of it all (though I am more of a “what does the research say” and Josh is more of the “what can we collectively observe,” both are valid ways to see the world).

But I will question that successful investing is a lifelong pursuit.  This implies that the question of how to best be a successful investor remains unanswered and that investors, be they amateurs or professionals, have time and money to spend in pursuit of a better investment strategy.  But it would be shortsighted to assume there is little to no cost in such a pursuit.

What happens to the investor who spends his or her first ten years trying to pick stocks, the next ten years interpreting macroeconomic models and the next ten reading the tea leaves of a price chart, before finally settling on a diversified, low-cost passive strategy? There is tremendous opportunity cost.

We would be arrogant and naive to assume that we must forge the path towards successful investing.  To act as if there is not already a body of knowledge at our disposal that spells out how to best increase our odds of success.  We owe it to the many who came before us who have already paid these opportunity costs so that we do not have to.  We instead get to stand on the shoulders of giants such as William Sharpe, John Bogle, Charlie Ellis, Eugene Fama and apply their hard earned lessons to our investment portfolios and recognize that our best path to success lies in minimizing tax drag, trading costs, and management fees and being well behaved investors.

So we will continue to study and read, to learn from those around us and those who went before us.  It is a wonderful intellectual exercise and a good time to boot. But we should not assume that the wheel needs reinventing, as the odds are likely that we will make it square instead of improving on its tested design.

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