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Charlie Brown the Retail Investor


Last week I tweeted:  Professional investors would be sad if retail left the mkt. Lucy would feel the same if Charlie Brown gave up trying to kick the football.

Now, I don’t like being cynical, but there is smart money and dumb money.  Some of the smart money is retail.  My mother and my late Father-in-law would qualify as “smart money.”  Most retail investors do not qualify as smart money.

Alice Schroeder spoke to the Baltimore CFA Society last week, on 11/7, and talked about Warren Buffett and his thought processes on investing, and the degree of focus he brings to his work.

No, average people can’t do what Buffett does.  99.9%+ of people can’t do what Buffett does.  Buffett leads the league in terms of the number of dollars of excess return he has created.

Most retail investors would be better off outsourcing to an investment advisor running separately managed accounts, which is more tax-efficient than mutual funds, and letting them brave the vicissitudes of the markets.

It is not that the investment advisor will beat the averages, but if he has a long enough time horizon and does not give in to panic and greed as most retail investors do, he will provide value to his clients.  He protects them from human nature.

That said, many investment advisors are subject to the same pressures, because they fear the reactions of their clients, if they underperform.

You might argue, “But I can buy index funds, lower my expenses, and live with modest underperformance, rather than greater underperformance on average from active managers.”  If you can do that, and control your emotions, good.  Most can’t.  They sell in a panic at the bottom, and allocate more near the top.  People can argue over rebalancing, but it does help people make better investment decisions, on average.

Though I am not fully happy with my performance for my clients, I have not changed my methods that worked so well for me in the past.  My methods that have worked well will work well again.

What I can say is that toward the end of a fiscal year, I sell one significant loser.  My clients gain the tax benefit of a long-term capital loss.  I may buy it back after the wash sale rules expire.  If I buy it back, it will be after significant study.  I don’t fall in love with stocks, though I usually hold them for three years on average.

As it is, whatever my clients get, I get.  I am the the single largest investor in my ideas, and clients get a clone of my portfolios, whether stocks or bonds.

Those who invest with me get my slowness to act.  My portfolio turnover is around 30%/year, versus 120% for most mutual funds.  Most investment decisions take time to work out, and retail investors leave before the workout occurs, and after disappointment.

I am not asking you to invest with me.  I am encouraging you to think more long term with your investments, and also consider how you can incorporate a margin of safety in your investing.

Aim for “pretty good” investing, and you might succeed.  Aim for “best” investing, and you will likely fail.  That’s the way of the market, on average.

And if I were Charlie Brown (who reminds me of my father) I would say to Lucy, “Okay, hold it there!”  And then, I would walk home, hug Snoopy and Sally, and get a good night’s rest in bed, and let Lucy suffer from holding the ball.

Portfolio Management, Stocks, Value Investing | RSS 2.0 |

3 Responses to Charlie Brown the Retail Investor

  1. [...] David Merkel, “Aim for “pretty good” investing, and you might succeed. Aim for “best” investing, and you will likely fail.”  (Aleph Blog) [...]

  2. [...] Aim for ‘pretty good’ investing and you might succeed (AlephBlog) [...]

  3. [...] big punt on Ireland (FT Alphaville) • David Merkel: Think longer term with your investments  (Aleph) • Apple Investors Are Still Wusses (All Things D) • DeMark Fibonacci Charts Embraced by Cohen [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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