Lessons From Investors Who Crash And Burn

icarus

There’s an ancient Greek myth about a guy named Icarus.

His father created wings made of feathers and wax. “Don’t fly too close to the sun,” said his father, “or the wax will melt and you’ll come crashing back to Earth.”

Icarus ignored the warning and plunged to his death. This story wasn’t supposed to keep Greeks from building wings.It warned people to heed good advice.

We can crash, burn and learn from our mistakes.But learning from the mistakes of others is a lot less painful. 

Images courtesy Pixabay

Read the rest of the article at AssetBuilder.com

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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3 Responses

  1. Patrick says:

    Hi again Andrew

    I had an interesting challenge the other day. As a Couch Potato convert I’ve managed to convince a few people to pull out of badly managed active funds, buy your books and start ETF investments.

    However, the other day a friend questioned saying ‘You speak a lot about how past performance is a bad way to decide on what to invest and is considered speculation. You use the analogy of looking in a car rear view mirror whilst trying to drive…yet, in Andrew’s book all his points are supported by historic data. Data that is used to speculate that if you’d invested say $X thirty years ago it would be worth $XXXXXXX today. How is this not the same this as looking at past performance of say Facebook or Google or any other steadily performing stock option?’

    I didn’t know what to say really so it would be great to hear your view so I can go back and defend The Couch Potato way of life 🙂

    Cheers

    Patrick

    • Hi Patrick,

      The answer lies in the Stanford published paper by Nobel Prize winner, William F. Sharpe. It’s called the Arithmetic of Active Management. If the market gains 2%, the average return of all active managers after fees, in stock market products, will be 2%. That’s because they (institutional managers, hedge funds, mutual fund managers and pension fund managers) represent the vast majority of the market. If the market gains 10%, the average return of all active managers (in stock market products) will be 10% before fees. That’s the explanation you need to give people. The indexing argument isn’t one that’s based on past returns. It’s based on simple arithmetic and how the markets work. But that explanation gets lost on many new investors. So we often just show past performance of active versus passive funds. Active management, as a group, can never beat the market after fees because they are the market. Deduct fees, and then they lose to the index. https://web.stanford.edu/~wfsharpe/art/active/active.htm

      Cheers,
      Andrew

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