Don’t Go Chasing Waterfalls

November 05, 2021

Chasing wa·ter·falls | \ ˈwȯ-tər-ˌfȯl (transitive verb)


1 : pursuing an impossible dream

Charlie Ellis is an investment consultant, and one of a handful of thinkers who are truly an individual investor’s best friend. The author of “Winning the Losers Game” (now in its eighth edition) stands right alongside Warren Buffett and Jack Bogle (started Vanguard) in his consistent and generous willingness to share his thoughts on investment success in a manner accessible and understandable for all.

With that introduction, consider what Ellis once wrote –

“There are three ways an investor can succeed. You can succeed intellectually, physically, or emotionally. The intellectual way is how we would all like to succeed: being so smart that we understand things more clearly and see farther ahead than every other investor. The preeminent example, obviously, is Warren Buffett. But people like him are very, very, very rare.

The physical way to succeed is simply to work harder. Start at dawn, grind away until after midnight. Carry home a heavy briefcase full of research and keep working right on through the weekend too. This way is the most popular on Wall Street, where nearly everyone seems to try it. I can’t say I’ve met people for whom this way actually works, but they must think it does, or they wouldn’t keep trying so hard.

The third way to succeed as an investor is difficult but possible once you realize who you are really playing against (hint – it’s yourself): emotionally. When that seductive fellow, Mr. Market (an allegory created by the legendary Benjamin Graham) comes around, you have to pay absolutely no attention to him, no matter what happens. You have to control your emotions, and most of the time that means the best thing to do is nothing.”

The most important variable – by far -related to success in the markets is this; It’s not about knowing “the markets.” It’s not about knowing which clever investment manager to follow today. It’s about knowing yourself.”

One of my favorite Ellis quotes is one that I’ve shared – “The hardest work in investing is not intellectual; it’s emotional. Benign neglect is, for most investors, the secret of long-term success.” Not being able to control your emotions when it comes to investing, is akin to walking through a dynamite factory carrying a lit match. At some point, you will blow up.

It All Starts with Proper Portfolio Design and Allocation.

Once you have properly set up your investment portfolio, what does Ellis’ concept of benign neglect do for you?

Well for starters, it lets you live your life. You can concentrate on what’s really important – faith, family, friends, etc. without being emotionally tied down by the day-to-day noise of the markets. Also, benign neglect gives your portfolio that time and space needed to actually grow. As we all know ( Compounding-The Eighth Wonder of the World), even an average return – sustained for long period of time – leads to extraordinary results.

But here’s the rub – To allow yourself the chance of realizing the full benefit of that growth, you must have the presence of mind to let your (proper) portfolio allocation work for you. When the economic and financial world gets stormy, leave your portfolio alone. Quit chasing waterfalls. Admittedly, no small task in this world of constant urgency and turmoil. So consider the advice of Ellis. He knows what he is talking about.

Got (proper) allocation? If you don’t know, give us a call.