New Year's Resolution: swear off snake oil

One of the central themes of the investment philosophy that we espouse is that the average individual, given a reasonable amount of intelligence and discipline, can manage his own investments.

This concept is contrary to what Wall Street has been selling for decades, which is that there is a magic to it, that you need to tap in to the Street, where there are special elite insiders who can predict for you what is going to happen next.

As we have noted, there is hard evidence that the formula that Wall Street sells investors not only does not work but is actually harmful to their long-term returns.

We have also noted that much of the academic theory that Wall Street has bought into since 1974, with arcane terminology such as Chebyshev's inequality, the Sharpe ratio formula, excess kurtosis, and Jensen's alpha, serves to heighten the illusion that the average investor needs to depend upon those who have been initiated into such mysteries in order to invest successfully.

We believe that the events of 2008 should have shattered that illusion for most investors.

This makes the beginning of 2009 a very good time to resolve to swear off Wall Street snake oil for good, and to begin a new and healthy investment philosophy.

In his 1973 distillation of his investment philosophy (to which we have referred on several previous occasions, such as here and here), the late Thomas Rowe Price began with these words: "The purpose of this article is to help the investor, particularly the amateur, by directing his attention to the simplicity and soundness of the growth stock theory and away from the belief of most people that you have to play the stock market in order to be successful" (emphasis added).

The phrase "particularly the amateur" highlights the fact that Mr. Price believed that you do not need to be a professional or a Wall Street insider in order to be a successful investor.

Instead, his investment philosophy emphasizes reliance upon ownership of businesses characterized by "capable, dynamic management operating in a fertile field for future growth." It is possible, given the willingness and discipline to do so, for the amateur investor to evaluate these characteristics with the available information.

The emphasis on the ability of the nonprofessional to successfully invest using the growth stock investment philosophy is no coincidence. The reason, as we explained in part two of this previous post, is that the growth stock theory is not based upon secret or proprietary information but rather upon selecting the best-run companies in fertile fields for growth, buying their shares, and retaining their shares "until it becomes obvious that they no longer meet the definition of a growth stock," in the words of Mr. Price.

It must be stressed that success requires a very consistent discipline -- most investors achieve mediocre long-term returns because they jump from one process of selecting investments to another several times during their investment lifetime. This common problem is very much like someone who dabbles in one martial art for a couple years, then switches to another, and then another, and then another, and never becomes accomplished at any of them, whereas an individual who selects one martial art (whichever one it happens to be) and then sticks with it consistently for twenty years can expect to achieve real results.

For those who have the discipline to stick to it, the beginning of 2009 is an excellent time to begin a twenty- or thirty-year journey of practicing the "martial art" of the classic growth style.

As professional investment managers practicing the classic growth investment style, a reader might wonder why we would emphasize that non-professionals can do it themselves. Wouldn't that secret, if it "gets out," tend to put us out of business?

Unlike the salesmen of Wall Street, who do in fact depend on the illusion that you cannot do it yourself, we are not worried about that problem. We know that not everyone has the inclination to sacrifice the time and effort needed to do so on a consistent basis, week in and week out and through gut-wrenching economic and market cycles. The fact is, most people could do their own home plumbing or cabinet-making too, if they wanted to take the time to learn how and to buy the necessary tools, but many choose instead to hire someone who makes that their full-time occupation.

Whichever category you fall into, we wish you a prosperous 2009, and believe that swearing off Wall Street snake oil is an excellent New Year's resolution.

For later posts dealing with the same topic, see also:

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