Thoughts on Investing

Thoughts on Investing from David E Hultstrom

• Stocks beat bonds (because they are riskier), but less consistently than you think.
• Value stocks outperform growth stocks (because people like growth stories and overvalue the companies, particularly in the small cap space), but again, less consistently than you would like.
• Simple beats complicated.
• It almost certainly isn’t different this time.
• Study market history.  In particular, read contemporaneous accounts of different periods.  As Mark Twain is reputed to have said, “History doesn’t repeat itself, but it rhymes.”  As Santayana did say, “Those who cannot remember the past are condemned to repeat it.”  And finally, another quote from Mark Twain, “The man who does not read good books has no advantage over the man who can’t read them.”
• Arguably the most valuable function you serve is keeping people on track and not being sucked into the euphoria or panics that periodically seize the market.
• Psychological mistakes are more detrimental than cognitive mistakes.  This applies to your clients and you. Study behavioral finance.
• If you get higher compensation to sell a particular product, it isn’t because it is a better product.  There is a very strong inverse correlation between what is best for clients and what pays the advisor the most.
• You will tend to be swayed toward products where the costs (including your compensation) are less visible to the client.  If you would be uncomfortable disclosing your compensation, avoid the product.
• You have undoubtedly heard and read disclosures that “Past performance is no guarantee of future results.”  I would go further:  Alpha is ephemeral and past performance is not only not a guarantee of future results, it isn’t even a good indicator of them though it certainly makes investors feel better about what are inherently uncertain decisions