Investing’s role in the social fabric of our western world has changed. It has become a life skill. Twenty years ago, the demands of “personal finance” stopped at knowing how to balance your checkbook and create and then stick to a budget. People’s retirements were provided for by defined benefit pension plans. If you ask someone in their 30s what a “pension” is, he or she will not be able to tell you. The job of planning for financial well-being has fallen to the individual.

Investing in general remains one of the best ways to grow savings to reach a state of financial well-being. The number of different goals people have for their finances are as numerous as the stars in the sky. The number of ways a person can invest money today has also grown to be similarly numerous.

Investors are more masters of their own investing destiny than ever before. They have more options for investing at their fingertips and 24/7 access to financial markets. How are investors doing with all these benefits? Well, for most, they are making a hash of it.


There is a growing body of research among investors that shows a widening gap between the responsibility borne by investors for investment decisions that lead to good results and the basic skills they need in order to successfully achieve those results. Annamaria Lusardi, economics professor at the George Washington University School of Business and Head of the Global Financial Literacy Center of Excellence puts it like this, “There is a mismatch between the complexity of the financial decisions we have to make…and our own financial knowledge.”

Skill shortages are apparent at both the core concept and behavioral understanding levels. From 2011 research conducted by the Library of Congress for the Securities and Exchange Commission we find that only one-third of Americans can answer the three core elements of investing literacy correctly – how compound interest works, the impact of inflation and the role/benefit of risk diversification. Many investors display what behavioral-finance experts call “overconfidence”: They believe they’re more knowledgeable than they actually are.  “There is a big disconnect between what people think they know and what they actually know,” Lusardi explained in a 2016 interview on the subject. This is particularly a problem among men, she said. Women at least “know that they don’t know.”

On the other side, having basic investing skills is proven to make a positive contribution to results. In Lusardi’s research cited above, those who knew more about basic finance concepts were more likely to plan successfully for retirement (only 47% of pre-retirees have done so). The most financially knowledgeable investors:

  • Held 18% more stock than their less knowledgeable counterparts;
  • Could anticipate earning 8 basis points per month more in excess returns (or a little over 1%/yr). That adds up big time due to compounding.
  • Had 40% higher portfolio volatility (due to higher stock exposure)
  • Held portfolios with about 38% LESS risk because they were well-diversified as compared to their least knowledgeable counterparts.

You’ll agree that those results are very different!


The rise of more democratic access to financial markets, company and investment information, investment research and online trading platforms has made “investing” accessible to anyone with an internet connection. Access to improved data and tools should be helping people manage investments better, but research from Nobel Prize winning professor, Richard Thaler, shows that the data deluge is giving investors a false sense of confidence. This research shows that the more information an investor had, the worse the investment results were. Put simply, the additional information and tools a researcher had didn’t give them an advantage. We think this result is a function of investors not understanding how to process investing information effectively. The end effect is one of overconfidence or a false sense of it because all this “data” is close at hand.


Much of this underperformance can be overcome by investing education, but who has trained us to do this? No one. These skills are not taught in conventional education, except in specialized programs. Once someone is “out of school”,  most of the fodder that passes for financial or investing education in the US is provided by the very banks and brokerages who are paid when we transact on their platforms. It follows that most of their education and tools encourage you to transact more. Most of it is, in fact, marketing material.

There are few independent sources of financial education. The material on the internet is highly generalized or academic making it hard to apply. Research services and newsletters present ideas, but do little to teach how those ideas were evaluated. They need subscribers to remain reliant on their “secret sauce.”

The result of these three investor problems is that investors REALLY don’t know what they’re doing. And that has a real cost. In fact, according to the 2017 Dalbar Report, Over the past 20 years, the S&P 500 has gained an average of 8.19% annually, but equity fund investors earned only 4.67% a year.  That annual gap of 3.52 percentage points cost investors $286 billion over that time, Dalbar estimated. The table below shows why:

Source: Dalbar 2017 Quantitative Analysis of Investor Behavior Study

This table illuminates the big hits to investors’ return performance and, as you can see, much of the pain is BEHAVIORAL!  By simply fixing behavioral errors and then paying attention to fees and expenses investors COULD recover over $180 billion of what was lost.


You can help yourself become a better investor starting right now by taking three simple steps.

First, understand how markets work and how intermediaries get paid (read about the Investing-Industrial Complex and download the PDF). Most intermediaries don’t share the same motives as you have as a principal investor. For example, fund managers get paid by collecting assets. Brokers want you to trade more. Advisors and investing newsletters want you to rely on their judgement. In the end, we are the ones who have to live with our returns, not any of the intermediaries.

Second, develop an understanding of decision making and behavioral biases. How much of a role does emotion play in your investment decision process? There are a variety of human reactions that impact our decisions about money. In order to not become slave to those reactions, we must understand them and be vigilant about avoiding them where possible.

Finally, beef up your investing skills such that you learn a sound, repeatable framework for making decisions. Do you understand compounding?  Do you know what it means financially to own a share of a company?  Can you work out how a company makes money such that some of it gets back to you as an owner? Do you understand the principles of risk diversification and asset allocation?  The sheer number of financial instruments and their complexity has exploded in recent years.  To deal with complexity, we must endeavor to understand it and have the right frameworks in place to do so.

Warren Buffett’s own words say it best, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business strengths or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”


Looking carefully at the most successful investors, we find that without exception, each of them has a PROCESS or a decision framework and they reap the benefits of that process in better annual returns.  The research above clearly shows this outperformance among individual investors and that outperformance only grows as we move on to the best professional ones – Buffett, Berkowitz, Klarmann, Einhorn, Whitman, Prabai,…the list goes on. Process matters.

Having a simple, manageable, value-based investment decision framework is the most important differentiator between a casual investor and one who is engaged and improving his or her skill set and results over time. Anyone can learn to do this. It just takes your time, some effort and practice – and the help of some highly skilled mentors (just like coming in new to a job on Wall St.). Indeed, you may not have a job on Wall St, but you can surely invest like you do.

We welcome your thoughts and questions on the above and how you might address this in a practical, manageable way – whether that’s portfolio design, single name positions and / or option related positions.