Stop Busting Your Assets!

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I've been doing a lot of reading lately on investing.  I'm currently reading 'The Intelligent Investor' by Benjamin Graham, Warren Buffett's mentor.  He talks in depth about two types of investors.  The defensive (passive) investor is one who takes the safe route and just invests in the overall market.  The aggressive (active) investor is one who knows how to read a company's financial statement and make decisions as if he were actually buying the business.  Basically, you don't buy anything that you don't understand.  When the active investor finds the business he wants to own at the price he wants to pay, he buys it planning to hold it indefinitely.  He has bought into a business and not a number on a ticker somewhere.

I found a great blog today that I will be referring to often.  It is called the Behavior Gap by a financial planner named Carl Richards.   I just want to highlight a couple posts for now.  The first post describes why the average investor does considerably worse than the average investment over time.  In short, you can outperform 99% of your neighbors simply by changing your behavior.  The role of a financial planner is not to find great investments but to develop better investors.  The second post describes what happens by the time that you find out that something is a great investment.   I mean, think about it.  What happens when you do exceptionally well at your job?  You are given more responsibility, more money, and so forth until eventually, you have reached a plateau.  Then the excellence turns to mediocrity and pretty soon, if you're "too big to fail", you end up asking Congress and the taxpayers for bailout money but, I digress.  These hot fund managers do well when they are small enough to fly under the radar but then, when more and more money gets dumped into the fund, the manager can perform about as effectively as the Hindenburg in a dog fight.  Then you, the investor, are back to square one looking for the next hot manager based on what?  His historical performance.

I wrote in an earlier post about advisors needing to manage their clients expectations and, Carl does an excellent job of showing how you can take control of the situation by managing your own behavior.

What are your assumptions about money?