What Can Investors Learn From Boy Racers?

The sound of squealing tyres & flat out engines in the dead of night, the sight of tyre rubber circles burned into the tarmac on our roads.

Impetuousness & over-exuberance swamping any degree of risk assessment, or likely no perception of risk at all, and the sad statistics in Ireland tell the story! The “thrill”, the “buzz”, the bravado & adrenalin, and then the reality of trying to pick up the pieces!

I came across a great analogy between the “boy racers” and speculating (or gambling; call it what you will as long as it’s not called ‘investing’!) in Ben Graham’s book, The Intelligent Investor, which he last edited in 1973!

He says, “To see why temporarily high returns don’t prove anything, imagine that two places are 130 miles apart. If I observe the 65-mph speed limit, I can drive that distance in 2 hours. But if I drive at 130 mph, I can get there in 1 hour. If I try this and survive, am I “right”? Should you be tempted to try it too, because you hear me bragging that it “worked”? Flashy gimmicks for beating the market are much the same: In short streaks, so long as your luck holds out, they work. Over time, they will get you killed.”

Stark words!

One can get into fancy maths in terms of investment risk assessment, like beta’s, standard deviations & so forth. Personally I don’t think all that is much use to the normal investor.

Here are a few ways which, in my opinion, may help the average investor with risk assessment and management:

• spend considerable time and effort delving into the subject of investment risk and assessing one’s own risk profile, or appetite for investment risk. I feel this is a subject we could usefully pay a lot more attention to in Ireland and it’s too deep to address in a few lines here
• allocate the time and effort to learn the art & craft of investment. Be guided by the principles of recognised experts who have proved their skill over time. And none better than Warren Buffett! Developing this skill does not happen overnight
• we need to work hard on understanding and differentiating between investment and speculating or gambling. They are worlds apart but are confused again and again and again …. As Warren Buffett says, if you’re not willing to own an investment for 10 years, then don’t even think about buying it for 10 minutes!
• take responsibility for our own investment decisions. Understand that the lowest price can in many circumstances lead to the highest cost and if we are not experts, then the highest value thing we can often do is pay for professional help and guidance. Fact
• always verify sources of information and if we can’t verify them, avoid using them. This particularly applies to Internet chat room banter and postings on Internet boards
• understand the investments we plan to make, and better still, understand the businesses behind the investments. If we are not certain we can do this, a good question to ask ourselves is, should be in the investment game just yet?
• don’t get taken in my media hype along the way. So smile when you read or hear a headline that says, “Investors lose as market falls ….”. Edit in your mind to “Disinvestors lose as market falls – but investors gain”
• a fair price for a good investment is streets ahead of a cheap price for a mediocre investment! Do the research and stick to quality
• appreciate that investment markets have always moved in cycles and always will. This means the market value of investments is always going up and down – it never stays still. To date it seems there are no consistently successful methods of timing these ups and downs, despite what we might like to believe, or who we might like to blame for particular investment problems we might have encountered. Investment skill, rationality, patience and time are our allies in this ongoing ebb and flow

On-topic thoughts, viewpoints and comments appreciated. Thank you.

Related posts:

1. Understanding Investment Risk
2. Can Investment Loss be Good?
3. Make More Money This Way or That?
4. Absolute Return Funds – Why Medium to High Risk?
5. Investment Risk & Reward