The Big Rocks
As I traipse around the country speaking to investing groups, or just stay in my cage writing my articles, I’m often accused of “disempowering” people because I refuse to give any credence to anyone’s hope of beating the market. The knowledge that I don’t need to know anything is an incredibly profound form of knowledge. Personally, I think it’s the ultimate form of empowerment. You can’t tune out the massive industry of investment prediction unless you want to: otherwise, you’ll never have the fortitude to stop listening. But if you can plug your ears to every attempt (by anyone) to predict what the markets will do, you will outperform nearly every other investor alive over the long run. Only the mantra of “don’t know, and I don’t care” will get you there.
An expert in time management was speaking to a group of graduate business students. After a brief introduction, she produced a large mason jar and set it on the table. Then she brought out a box filled with big rocks. She removed the rocks from the box and began to carefully place them, one at a time, into the jar. When no more rocks would fit inside the jar, she asked the class, “Is this jar full?” Everyone yelled, “Yes.” She replied, “Oh really?”
She pulled out a bucket of gravel from under the table and dumped some into the jar. Pieces of gravel moved into the spaces between the big rocks. She continued this process until no more gravel could be placed into the jar. She asked again, “Is the jar full?” One student answered, “Probably not.”
She then reached under the table, brought out a bucket of sand, and dumped the sand into the jar. The sand began to fill the spaces between the rocks and the gravel. She continued until no more sand could fit into the jar. Once again she asked, “Is this jar full?” Everyone shouted, “No!”
Finally, she filled the jar with water and asked, “What is the point of this demonstration?” An eager student said, “The point is that no matter how full your schedule, you can always fit in one more meeting!”
Once the laughter had died down, the speaker replied, “That’s not the point. This demonstration teaches us that if you don’t put in the big rocks first, you’ll never get them into the jar at all. What are the big rocks in your life? Time with your loved ones, your faith, your education, your dreams, your career, a worthy cause, teaching or mentoring others?” She concluded by repeating the important message: “Remember to put these big rocks in first, or you’ll never get them in at all.”
Individual investors following an active management strategy spend much of their precious leisure time watching the latest business news, studying the latest charts, scanning and posting on internet investment discussion boards, reading financial trade publications and newsletters, and so on. What they are really doing is focusing on the gravel, the sand and the water, leaving insufficient time for the big rocks. On the other hand, investors who adopt a passive investment strategy ignore the “noise” (the sand, the gravel and the water). They are playing the winner’s game and focusing on the big rocks, the really important things in their lives.
Consider these words of wisdom from Paul Samuelson, probably the most famous economist of our time: “You shouldn’t spend much time on your investments. That will just tempt you to pull up your plants and see how the roots are doing, and that’s bad for the roots. It’s also very bad for your sleep.” 1 The following true story demonstrates these points better than a fictional story would.
Shortly after my first book on the winning strategy was published in 1998, a doctor called and related this story. He had been in practice a few years and had a wife, a young child and one more on the way. Many of his friends had generated large profits from trading stocks, and he became caught up in the euphoria of the bull market.
After putting in a long day at the office, he would come home to his computer and the internet. He spent hours studying charts and investment reports and following the chat boards. He was caught up in the excitement of the bull market, a technology revolution that was changing the world, access to information the internet provided, the hype surrounding the success of day traders, and so on. The expansion of the coverage of financial markets by the financial media helped fuel the interest in active management and the “take control of your portfolio” mentality. Within just a few months, he had turned his small initial investment into about $100,000.
Unfortunately, his wife no longer saw her husband, and his child no longer had a father; the doctor was now “married” to his computer and his investments. His wife began to seriously question their marriage. Luckily, he lost all his profits within a few months.
Fortunately, the doctor recognized that he was not paying attention to the most important part of his life- his family. He also realized that his original gains were a result of luck, similar to a hot hand at the craps table. Someone suggested that he read my book, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” After doing so, he called to thank me. He told me that he recognized his error and had designed a portfolio of index funds and sworn off active investing.
The following is another true story. It too made me realize how adopting passive investing as the basis for one’s investment strategy can improve the quality of one’s life as well.
About one year after my first book was published, I met a colleague and sophisticated investor with an M.B.A. from Wharton University of Pennsylvania, and a B.B.A. from Wake Forest. He had about 30 years of experience in financial management, including his last position as assistant treasurer at a major corporation. After meeting with my firm, and having read my book, he was so convinced this was the winning strategy that he wanted to help others benefit from adopting its principles. Eventually, he became a financial advisor. In short order, he completed the extensive educational requirements for his Certified Financial Planner certification. He later related the following story.
He told me that he used to spend many hours every day reading various financial publications, researching individual stocks and watching the financial news. And this was after spending a long and full day at the office. After learning of and adopting the principles of modern portfolio theory, the efficient market hypothesis and passive investing, he found that he no longer needed to do those things. He recognized that he was paying attention to what was really nothing more than noise that would, at best, distract him from the winner’s game.
He sat down with his wife and calculated that by adopting a passive investment approach, he had recaptured six weeks of his life per year. It is one thing to decide to spend six weeks a year on productive activities. However, as he had now learned, not only were the activities in which he had been engaged nonproductive, they were actually counterproductive because of the expenses and taxes incurred as a result of his active strategy. And that didn’t even include placing a value on his most precious resource: time. He only had a limited amount of it and did not want to spend it on less than optimal activities.
Don’t Sweat the Small Stuff
I became the chief research officer of Buckingham Wealth Partners because I wanted to provide investors with the knowledge they need to make prudent investment decisions. I wanted to help prevent the wolves of Wall Street from shearing (and in some cases slaughtering) investors, as if they were sheep. Through my writings and interactions with investors, I believe I have accomplished that objective-though there is still a lot more work to be done.
Helping clients ignore the noise of the market and the investment pandering of Wall Street by arming them with knowledge of how markets really work and a custom, tailored investment plan for their unique situation has resulted in one of the greatest pleasures I have received from my efforts: helping clients improve their qualify of life.
In my particular case, I was able to spend my time coaching my children’s sports teams. Over the years I have coached my daughters in soccer, basketball and softball. I also have been able to attend their sporting events and dance recitals. I am also an avid reader. While I read about 10 to 20 investment books a year as part of my research, I also read another 50 to 60 books annually, ranging from popular spy novels to great literature.
Indexing and passive investing have the “disadvantage” of being boring. I admit it. However, if anyone needs to get their excitement in life from investing, I’d suggest they might want to consider getting another life.
Personally, my life is enriched by participating in and attending sporting events. And I get excitement from my passion, whitewater rafting. There is no question in my mind that I get all the excitement I need from life staring a Class V+ rapid in the face. I have been on over 40 whitewater adventures, on more than 30 different rivers, in 10 different states, many of them containing Class V and Class V+ rapids. I have even experienced the thrill of going overboard on a Class V rapid on the Youghiogheny River in Maryland, and a similar thrill going down a Class V section of the Arkansas River in Colorado, which, by the way, is one thrill I can do without.
And more importantly, I have been able to share many of those experiences with my family, especially my oldest daughter, Jodi. She loves the sport so much, she took canoeing classes while attending Emory University and trained to be a guide.
While it is a tragedy that the majority of investors unnecessarily miss out on market returns that are available to anyone by adopting a passive investment strategy, the really great tragedy in life is that they also miss out on the important things in pursuit of the “holy grail of outperformance.” If you find that you need excitement from your investments, you should set up a special “entertainment” account. The assets inside that account should not exceed more than a few percent of your total portfolio. Invest the rest of your assets in what I believe to be the winner’s game.
The Moral of the Tale
The moral of this tale is that indexing, and passive investing in general, not only allows you to earn market returns in a low-cost and tax efficient manner but also frees you from spending any time at all watching CNBC and reading financial publications that are basically not much more than what Jane Bryant Quinn called “investment porn.”
Instead, you can spend your time with your family, perform community service, read a good book or pursue your favorite hobby. Remember, investing was never meant to be exciting despite what Wall Street and the financial media want you to believe. Investing is supposed to be about achieving your financial goals with the least amount of risk.
Paul Samuelson, Quoted in Jonathan Burton, Investment Titans (McGraw-Hill, 2001).
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. While reasonable care has been taken to ensure that the information contained herein is factually correct, there are no representations or guarantees as its accuracy or completeness. No strategy assures success or protects against loss.