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Strategies for Retiring Young, Soon, and Wealthy
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| Jul 20, 2003 6:49 am |
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Harry Browne on investing |
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THE WISDOM OF HARRY BROWNE
IN THE REAL WORLD:
No one accurately predicts human behavior in other matters, so
there's no reason to expect anyone to predict future investment
prices.
Coincidence and luck play a large part in any investor's results
and they can make a nonsensical technique appear to have been
confirmed by history; so be skeptical of "past performance".
The truth often is stretched in the investment business, just as
it is elsewhere - so take all claims for an advisor, trading
system or method of analyses with a grain of salt.
Any assertion that a particular method of investment analyses is
"scientific" should be ignored. Controlled tests aren't
possible for economic theories.
Don't believe an investment rule simply because it seems to be
widely respected.
If there were a single trading system or school of investment
analysis that could beat the market, investment advisors and
system creators wouldn't be continually devising new systems they
hope will beat the market.
If anyone had found the magic key to investment riches, he
wouldn't be telling you of the profits his system would have
produced (hypothetically), he would be telling you of the profits
it did produce.
Testimonials for investment systems and advisors are of no more
value than they are for gurus, astrologers and used-car dealers.
Some people are especially talented as investors or speculators -
just as some people are talented athletes or musicians. Don't
expect to imitate them successfully unless you have similar
talents.
THE IMPOSSIBLE DREAM:
Efforts to understand and control the apparent randomness of
financial events often follow a predictable pattern. Whether
it's predictions, trading systems, numerical projections, cycle
theories, most rules of technical analyses, or whatever:
1. Grain of Truth: A fantasy is usually founded on a principle
that makes common sense as a generality - an observation about
life or the investment markets that seems self evident when
called to your attention (or "back-fitted").
2. Over the Edge: This principle is then stretched beyond the
limits of it's usefulness. Instead of being a reminder it
becomes a school of analyses.
3. Scientific Posture: Mathematics and the name of science are
invoked.
4. Coronation: The fantasy becomes enthroned. The market
pattern that now and then seems to hold true becomes a tenet of
natural law - it simply happens too often to be coincidence.
5. Sweet Superiority: Those who follow the system, advisor,
etc. become the "elite". No matter how many times the plan goes
wrong, they must be better off than the poor boobs who are not
"with it".
6. Dogma: In fact, there is never a need to acknowledge that
something went wrong because:
a. It really did work but was offset by factors that were
stronger in this case.
b. The system is perfect but people practice it
imperfectly.
c. This was the exception that proves the rule.
d. It happened exactly as expected; you must have
misunderstood the expectation.
e. It was a clear cut, textbook example, of the principle
working on an inverted/extended/reversed basis.
f. The result has been delayed, pressure is building up,
and the result will be very dramatic when it comes.
g. (place your favorite excuse here).
The study of the paranormal and the para-economic can be fun but
in the real world there are principles of logic and truth that
can't be overruled; If a theory in economics can not, step by
step, be explained in terms of the actions of human beings then
the idea is simply superstition. Just ask yourself: By what
process are human beings moved to acquire an investment when it's
price touches a trend line - or to dump stocks when a price falls
below a moving average - or to keep buying until a price rises
1.618 times a previous price and then start selling? Is the
action of a human investment hormone revealed in cycles and waves
like those in a biorhythm chart? Is the majority always wrong?
BACK IN THE REAL WORLD:
People achieve because of a philosophy of life which has helped
them deal with problems and complications, to learn what they can
know and to allow for what they don't know. To handle conflicts
between competing ambitions and desires. To accept uncertainty
and plan for it. The logic of investments is the same logic used
in day to day life, invoking standards of proof which are
consistent and comprehensible to the individual.
Principle #1: Look at your investments in the same way you view
the rest of the world.
Principle #2: No one can get you into and out of any market with
precise and consistently profitable timing.
Principle #3: Don't keep all of your capital in one market.
Principle #4: Recognize the difference between investing and
speculating - trying to earn what the market offers and trying to
outguess it.
Principle #5: No one can predict the future. Forecasts are
often interesting but it is foolish to base an investment
decision on one without extensive corroboration.
Principle #6: No trading system or market indicator will get you
into and out of markets profitably over a period of time.
Principle #7: In the investment world, as in life, almost
nothing turns out as expected. So planning for the unexpected is
the only rational course of action.
Risk is a part of life and it is impossible to remove or entirely
avoid it. Analyzing and seeking the premium you require to
compensate you for a risky investment is part of the game. A
minimum ratio of 5:1 is a good rule of thumb (you require at
least five times as much in return as you risk losing). Still,
it is always wise to remember:
Investment rule #1: When in doubt about an investment decision,
it is always better to err on the side of caution; ie, it is
better to lose an opportunity than to lose money.
Browne, Harry; "Why the Best-Laid Investment Plans Usually Go
Wrong & How You Can Find Safety and Profit in an Uncertain
World", (New York: Fireside Books, 1989).
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