The Problem

James Pope |

DIS and DAT - The Problem - Winter, January 2015

Our periodic communication that reminds you to ask, “Should I react to those headlines?”

“The entire concept of retirement is unique to the late-20thcentury. Before World War II, most Americans worked until they died.”
―Morgan Housel

Dear Friends:

As discussed in our previous pieces we wanted to reflect just a tiny bit about “the problem.” As Morgan Housel suggests, retirement is a recent phenomenon. Prior to the recent times, most people worked until they no longer were capable of work. If this wasn’t when they died, they relied on others to take care of them.

At some point, governments began creating laws for currency. This creation worked great; one could “store” the value of their excess work. This currency could be used later if they found themselves unable to work. Unfortunately, not long after currencies were created, destroyers of that value arrived. Along came thieves, bank robbers, taxes, inflation and other negatives that could decrease the value of that “excess storing” of work. To sum it up “risk” accompanied these savings.

Introduced into human lives were such philosophical questions such as, “is a bird in hand worth two in the bush?” In other words, how much money should we spend today versus save for tomorrow and risk that the “birds fly off?” How do we invest given uncertainty?

Governments and large corporations, which have a high stake in both encouraging work and encouraging older folks to retire, began trying to solve the problem. Pensions and social security rules and laws were developed which basically forced the workers of today to fund the retirements of the workers of yesterday. Unfortunately risk did not disappear. The math and incentive structure began to break down creating “cuts” from the original promises to retirees and increased “contributions” from the current workers at the same time.

Never the less large corporations and governments still need to encourage younger people to work and older workers to retire. So they began placing the burden and responsibility on the individuals through IRA’s, 401k’s and similarly labeled “retirement savings accounts.” Unfortunately, you guessed it, risk still exists! Despite the creation of FDIC backed cd’s, US treasury backed inflation protected bonds and private annuities, they could not wipe out risk!

Now we have a system where individuals work for thirty years at a certain skill to retire needing to possess “investment skills.” According to Dalbar studies the average individual investor struggles to keep up with inflation despite investment tools like the above mentioned and stocks, bonds, mutual funds, preferred stocks, hedge funds, real estate, index funds, etc. All the tools have not increased the average investor’s returns.

Noticing an opportunity advisors and organizations giving advisors credentials were created to help these individuals. So far it appears “risk” still exists despite all the fancy reports and confusing symbols behind names.

As you may have gathered by now we believe the problem is that humans cannot see the future. That future is filled with known and unknown risks for the investor. DIS cannot solve this problem either.

We do believe that investment skills and knowledge can be improved. Unfortunately even with improvement an investor will not avoid risks, nor constantly outperform others. Alice Schroeder wrote an auto biography on Warren Buffett, and in an interview said of what Warren does…

“Investing is simple, but not easy.”

The skills we have seen from top investors include but are not limited to:

  1. 1. Read, read, read. They read because they are aware that risk exists and it is the number one enemy. They will not avoid it, but they read in order to cut down on the size of their “mistakes.”
  2. 2. Be comfortable being wrong. They are also comfortable with losing. Closely related they are comfortable being laughed at and unpopular.
  3. 3. Patience. Despite instant quotes and news, they have an ability to look through the current noise to the long term.(yes even at ages above 80)
  4. 4. Persistence. They keep strong in the face of fear. While others are panicking and investments are sharply declining in price….. they find a way to move ahead. They find a way to follow and improve their investment process.

These are just a few of the abilities that successful long-term investors possess. We realize that we do not live at Lake Woebegone where risk disappears and all humans will not be above average.

The good news is that individually you can improve your investment knowledge. Whether that is used to find advisors or do it yourself you can decide. If you enjoy reading on the subject we suggest reading our two pieces on “process over outcome”

located here:

DIS and DAT - January 2014 - Process over outcome Part 1

DIS and DAT - April 2014 - Process Over Outcome part II

If you are interested and would rather talk you can give us a call to discuss as well.

See you next time

James Pope


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