This past weekend my family was fortunate enough to spend time on Martha’s Vineyard and I smiled when seeing this old sign again.
It has sat for many years at the edge of a grass airfield – a simple weather-divining device involving only a stone and some pithy instructions. It is a little worn, but the message has endured. Not just because it’s funny, but because it serves as a commonsense reminder to pilots:
Before executing a flight plan, take a step back and don’t rely solely on complex models and fancy planning tools.
If the stone is wet, it’s raining, if the stone is white on top, it’s snowing, if the stone is gone… hurricane.
Some years ago, I was spending an evening at a home, which is across the street from the airfield. As can happen over Cape Cod and the Massachusetts islands, a thick fog had crept in from the Atlantic. Just as the sun was going down, we heard an aircraft flying in circles over the house, lower and lower, and finally disturbingly close to the roof, as it attempted to find the Katama airfield in the fog. Our uneasy anticipation of a plane crash went on for what seemed like an hour. We eventually stopped hearing the noise and prayed that the pilot had veered off for the lighted runways of the main Martha’s Vineyard airport or across Vineyard Sound to Hyannis. In the morning, we checked in with the airfield. Thankfully, no accident had been reported, but everyone had heard the same disturbing sounds. We all agreed that bold pilots can get themselves in trouble by relying too much on belief in their skill or fancy equipment. The saying goes, “There are many old pilots and many bold pilots, but very few old, bold pilots.”
What does any of this have to do with investing?
Plenty.
The investment world produces many forecasts and strategies designed on complex models and calculations. Product offices are staffed by PhD’s in math, statistics and physics. Actual rocket scientists are developing solutions that promise to add alpha and provide protection to help investors weather market conditions.
In my professional investing life, my firm keeps abreast of the latest ideas and we explore new solutions that might help our clients. As I wrote a few years ago in our Don’t Be A Sheep blog, however, we try hard to resist the pull of fancy new approaches and try not to run with the herd.
Why?
Because, consistently, the evidence shows that well-worn, simple approaches not only keep up but often outperform.
By posting this, I’m not suggesting that some complex strategies don’t add value. Some do.
What I am pointing out – again – is that simple, fully transparent, low cost and easy to understand portfolios can keep up and even outperform complex strategies. They are not “need-to-dos.”
At the end of the day, there will always be fancy new products and strategies in the investment marketplace. There are a lot of cool new gauges and instruments, too – analyses by smart economists and market historians.
Take them all in, to whatever the limit of your tolerance for studying the markets. But don’t forget the following:
If a strategy is so complicated that it can’t be explained in simple terms that you understand, consider passing on it in favor of something you can understand thoroughly enough to sleep at night.
Fancy and complex can sound great, but increased complexity can also mean increased opportunity for mistakes or course corrections at the wrong time.
Even though a forecast looks promising, remember that models based on complex theories sometimes break down, especially when fog or unpredicted market storms develop. Yes, all too often, “projections are based on estimates (yes, estimates based on estimates) and… contain a considerable amount of uncertainty.”
Before starting a journey or making a major change in your financial flight plan, take a good look around at what the evidence in front of you is saying. Take a step back and consider that the best ideas, those that keep us out of trouble and on plan, may come from keep-it-simple “rock science.”
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For more related to this consider a read of the following:
An Important Lesson for All Investors: Keep It Simple – Wealth Management – February 2018
How Can Trustees Be Prudently Passive? – Trust & Estates – September 2017
Stay It Ain’t So Joe – Again – Fiduciary Wealth Partners – June 2017
Good words Preston. There’s also a saying in the Air Force to “Fly the plane” when trouble arises. That means don’t get fixated on the all the details so much that you lose your focus and forget to fly the plane. Sometimes people get fixated on all the new bells and whistles in the financial world and can forget what got them to where they are now with their long-term investments. When those situations arise with our personal investment portfolio, my wife and I always just remember to “Fly the plane” and keep a steady mind and hand on the controls!
Wise words from a wise commander. Thanks Steve.