How Belief Drives investing Behaviour

 Do you believe that a well-schooled financial advisor, armed with algorithms and research, should be able to tell you: 

1. When to get in or out of the market, based on global, economic, political, and environmental conditions? 
2. What stocks and bonds to own and what stocks and bonds to avoid? 
3. When to sell underperforming stocks and replace them with higher performing positions? 

Do you think paying an advisor a fee to do these things improves the odds of a favorable return and certainly more so than one could achieve on one’s own? 

Do you cotton to the notion that there are advisor fees, fund fees, turnover fees, some of which are declared and some of which are undeclared? 

Do you believe that a dandy from Yale or Harvard enjoys a greater probability of hitting the stock market lotto than an entry level advisor from a non-descript school with one year experience under his belt? 

Do you fancy the idea that owning some asset classes and ignoring others is a good, long- term strategy, or that owning a heavy concentration of stocks in the U.S. constitutes a sound financial strategy? 

Do you hold to the notion that multiple advisors add a layer of diversification that cannot otherwise be achieved? 

Do you concede that investing in the market is something of a gamble, not unlike picking horses or buying a lotto ticket in hopes of buying the next start-up that hits it big? 

Do you imagine that most investors in the market do ‘what everyone else does,’ by following an advisor’s lead? 

Your answers betray an underlying belief that finding the best, the brightest and most accomplished advisor may be your ticket to financial freedom. You may be out of luck. 

Economist Burton Malkiel, in his finance book A Random Walk Down Wall Street, now in its 13th edition, notes that “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” i Sheer luck is at play here, with a nod to the actual monkey Raven Thorogood.

Dr. Harry Markowitz and Eugene Fama iii de-masked Oz in each of their Nobel Prize winning works on the study and performance of markets over time. iv Methods of investing were described that were based on decades of data instead of an advisor making predictions about market ups and downs and the performance of individual stocks. 

It’s a safe bet to say that Charles Ellis is in alignment with the work of Markowitz and Fama, evidenced in his book, Winning the Loser’s Game. He says, “unhappily, the basic assumption that most institutional investors can outperform the market is false.” v 

• If you believe that it’s possible to see the investing world differently. 
• If you think there may be something to know that you might not know. 
• If you think the stakes are high enough that your knowing matters. 
• Read Ellis. Start there but don’t stop there. 

We do what we do because we hold certain beliefs on which we act. If you’re not fond of speculating with your money, based on predictions about the future, it may be invaluable to explore the fundamentals of investing like a scientist. 

I believe it will be worth your time. 

Randall E. Davey, CAP® is a financial advisor with Guide Advisors, Inc. In certain circumstances, he may offer insurance as a sole proprietor or through Guide Advisors, Inc. Randall can be reached at randall.davey@guideadvisors.com or by phone at 425-478-5668 

Advisory services are offered through Guide Advisors, Inc., a Registered Investment Advisor in Washington, and other jurisdictions in which it may conduct business. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the states listed above or where otherwise legally permitted. All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. The information contained in this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed.

i A Random Walk Down Wall Street, 13th Edition by Burton G. Malkiel, 2023, W. W. Norton & Company 

ii Remembering Raven Thorogood III: The chimp that smoked Wall Street, https://thenextweb.com/news/raven-thorogood-the-stock-market-chimp-that-smoked-wall-street-investing, accessed August 23, 2023 

iii The Nobel Prize https://www.nobelprize.org/prizes/economic-sciences/1990/markowitz/biographical/ and https://www.nobelprize.org/prizes/economic-sciences/2013/fama/facts/; accessed August 23, 2023 

iv Risk-Return Analysis: The Theory and Practice of Rational Investing (Volume One) by Harry M. Markowitz, 2013, McGraw – Hill and The Fama Portfolio: Selected Papers of Eugene F. Fama Illustrated Edition by Eugene F. Fama, 2017, University of Chicago Press 

v Winning the Loser’s Game: Timeless Strategies for Successful Investing, 8th Edition by Charles Ellis, 2021, McGraw Hill  

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