Broker Check

The “Red Pill”

“You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth. Nothing more.”
-- The Matrix, 1999

The term red pill refers to a human that is aware of the true nature of The Matrix.

So, do YOU want to know the “truth?”

LTJG Kaffee: “I want the truth!”

Col Jessep: “You can't handle the truth!”
-- A Few Good Men

Can you handle the truth?

Investing your hard earned money or accumulated savings is like being in the Matrix or living with built in attitudes not unlike those Col Jessep refers to. Like the Matrix, the public has been conditioned, almost from the time cognitive abilities kick in to believe that there is someone or several someones who have the ability to predict the future, which in the investment world means the ability to pick the best stocks that for sure are going to go up or to be able to forecast consistently when to get into or out of the market (or a specific asset class).

What is worse is that those in a position to supposedly know better don’t. It is not from any evil intent but these “professionals” really do believe the advice they are promulgating and actions they take on behalf of investors. Even worse is the media which has no compunction about sensationalizing investment advice and stories as a means of hyping ratings. The old broadcasting adage is still relevant: “if it bleeds it leads,” meaning that the more they can sensationalize the better it is for ratings. Thus, in bad times, hyping doom and gloom and scaring investors sells. In the good times, touting the latest and greatest “new paradigm” or who the new “guru” on the block to be listened to is their stock in trade.

Well, here’s your “red pill:”

Have you ever asked yourself (likely not), if they really knew which were the best stocks to buy or what markets were going to be the best to invest in tomorrow, next week, month, year… why are they giving you this information for free (in the media) or selling it to you for a minor percentage point or two? If you had this “knowledge” wouldn’t you keep it for yourself and become richer than Warren Buffet or Bill Gates? Why are they being so good to you? The dirty little secret is they don’t know and can’t pick the best stocks or forecast the markets with anything resembling consistency. If they could, if they really could, all these best minds in finance wouldn’t be consistently outperformed by the markets over any period of time you wish to measure (yes there are some outliers who actually do outperform the market over specific periods of time. However, the vast majority is unable to sustain or repeat that performance and a winner in one period is often the loser in the next with a different set of winners succeeding him or her).

Take mutual fund families. They have many different mutual funds. They have really bright MBA’s managing them, all looking for the “best” stock(s). If they really knew, why would they need all of these different funds they’d only need one: “the really big great mutual fund” and how many stocks would they need to own if they really knew – just one – the best one!

OK, maybe they don’t know the best stock to buy but with macro-economic analysis, watching the flow of funds, FED actions, political situations around the globe, they’d know when to get into or out of markets or when was the best time to invest or the best time to pull your money out.

I believe the best rejoinder to this supposed technique of market timing is that of the late John Bogle, founder of Vanguard Funds. When asked if there was any validity to market timing his response was: “I don’t know anyone who has been able to do it consistently (market time) nor do I know anyone who knows anyone who has been able to do it.”

Well you ask, I can always check out the past performance of these managers and based upon that I can easily choose the best one and let that individual manage my money? Not so fast Kemosabe. All of the academic studies have shown that past performance in one period has zero correlation with performance in the next. I think that the entire question about what truth you can apply to investing (the red pill) has been summed up by Nobel Laureate Daniel Kahneman:

“What is really quite remarkable in the investment world is that people are playing a game which, in some sense, cannot be played. There are so many people out there in the market; the idea that any single individual without extra information or extra market power can beat the market is extraordinarily unlikely.

Yet, the market is full of other people who believe them. This is one of the great mysteries of finance: why do people believe they can do the impossible and why to other people believe them?”

The ultimate “winner” is the market itself!

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