Thread by @theBuoyantMan

Recently saw a Google Talks presentation of @jposhaughnessy which was filled with wisdom nuggets. Listing some of them down here.

1. The only point of failure that a passive
investor faces is panicking near a market bottom and selling out of all of his or her index funds. That's really the
only thing they have to worry about.

By definition, they're getting the average return, they're getting the low costs, they're getting a lot of really good things.

But they do face that point of failure and, sadly, I have seen many, many people who swore that they would never ever do such a thing do exactly that.

2. Active investors face two points of failure. The first is the same as the index investor. We panic and we sell out
before or near the bottom of a market-- but the second one is really more insidious.

The second point of failure that we face is we suddenly are comparing our returns of our investment strategy or our ETF or our mutual fund with its benchmark.

3. People mismatch their time frames in investing. So the majority of people who are actually making decisions on whether they're going to stick to an active strategy are using possibly the worst time frame to look at and that is three years.

Josh Brown, who blogs at a site called The Reformed Broker, found a really neat study. And this study basically showed that investors who fired an active manager for under-performance and hired somebody else-- guess what happens?

The manager they fired goes on to do vastly better than the manager they hired. I'm sure many of you are engineers, so you understand the concept of reversion to the mean. They had a bad three-year period generally-- not always-- but generally followed by a good 3-year period.

The manager that was hired, well, guess what? They're coming off a great 3-year period and we love those numbers. But he/she ends up having a worse 3-year period right after you picked.

4. Bloomberg does surveys of investors every year. When are they absolutely at their most bullish? Well, the last extremes that we noted were in the dot-com bubble. The vast majority of every investor that they talked to and surveyed-- wildly, crazy bullish on the market.

When was the lowest amount of bullishness in the market? Near the bottoms of the financial crisis. And what's interesting is we can't help ourselves.

So when our ancient ancestors were on that plain in Africa and the bush was rattling, one of them ran away, the other one went, oh I wonder what's in that bush.

Guess whose genes got passed down to us? The guy who ran away.

So the idea that flee-- let's get out of here-- came down us through our genetic inheritance, and it is very, very difficult to overcome.

5. "If you cannot describe what you do as a process, you don't know what you are doing."

So basically, if you're a good active investor, you will always value the process over the outcome.

6. On Twitter, everyone keeps saying something.

The market's going to collapse. The market's going to soar. This stock's going to do well. This stock's going to
do poorly. Fact of the matter is they have zero effort at getting a correct forecast.

Forecast, the old maxim was 'forecast early and forecast often' because you're always going to probably get it really, really wrong.

What we do when we're looking at forecasts is we get sucked in to the story of the forecast.

People who predict/forecast have no idea what they are talking about, and yet we love it right because we
crave narrative. We want to know the future.

So, I will predict that in the future people in the future will think they can forecast the future.

It doesn't matter how learned you are or how base.
All of us believe that we can forecast the future, and we can't. It is our very human nature that makes us want to be able to make those types of forecasts.

7. To be a good active investor requires patience and persistence, and most of us are not genetically designed
to do this. We want results now, right. We want the win. We want to be able to look up at the monitor and see, "wow, it's up half a point since I bought it."

8. During the dot-com bubble virtually every story I read about Warren Buffett was, "man, great guy, used to have
the chops. He's just too old. Do you know that he doesn't use email? He writes it out longhand and his assistant emails it. Come on. This guy just doesn't get it."

And you listen to people talking about him on
CNBC, same thing. "Yeah, he had a great run, but we got a brand new economy. He's a relic. This guy just can't do it anymore". Did Buffett change anything that he did? Absolutely not. He was patient. He was persistent.

And he has a very well-known group of things that he looks for. And yet look at his 10-year win rate. 100%. You don't see too many 100% 10-year rates. How did he achieve that?

By paying zero attention to all of the noise, all of the people calling him out, making fun of him.

All of that was happening around that time. And he just stuck to his game because he knew that game, and he knew what his base rates were. He knew what his level of success was.

9. If you want to be an active investor, you have to face the idea that there will come a point in time where you'll look really stupid. The path of an active investor - hero, goat, hero, goat, hero, goat. If you don't have the gumption to go through that, it will be difficult.

10. "You don't want to believe in luck. You want to believe in odds."

We live in a world where people believe more in possibilities than they believe in probabilities.

11. A highly-concentrated portfolio tends to lead to the best results, but, it can also lead to the worst results over a short period of time. If you're in the group that wants to achieve that long-term excess return, you've got to take the good with the bad.