The 3 Most Dangerous Words in Investing

August 9, 2016  |  

The 3 Most Dangerous Words in Investing

In my 30-plus years of experience in investment management, the three most dangerous words I hear are those found in observations that begin with, “We all know…”

We all know … that stocks are overpriced (or underpriced).

We all know … that interest rates are about to rise (or fall).

We all know … that domestic (or international) positions are outperforming (or underperforming).

“We all know …” proclamations usually make a pivotal, if flawed presumption. They presume that just because we know something, we can confidently use it to make profitable, well-timed trades.

Therein is a problem. If there’s one thing we do know, it’s that anything that is common knowledge has already been incorporated into securities prices – too late to capitalize on it. Any new knowledge is rapidly incorporated as well – too quickly to capitalize on it. Today, sophisticated computer-based strategies take advantage of any security mispricing that does occur within microseconds. This understanding has been described in Nobel Laureate Eugene Fama’s lifetime work on market pricing as well as in many other evidence-based inquiries.

In other words, trying to beat the market’s aggregate wisdom is a tall order indeed. Each day, tens of thousands of Chartered Financial Analysts, fund managers, institutional portfolio managers and similar strategists are leveraging everything they and their whiz-bang software programs can discover to try to outsmart one another, trading huge amounts of money in the process: $302 billion dollars of stocks traded every day in 2014.

That’s a lot of money searching for undiscovered performance-enhancing knowledge. With all these collective discoveries of all that “We all know …” information, even the best and brightest professionals face steep odds against individually outperforming their indexes after the costs involved.  Consider how few actively managed mutual funds, for example, have both survived and beat their comparable index over the 15 years ending in December 31, 2014.


Thus, on average, even if the typical investor had a good insight that was theoretically profitable, the professional competition referenced above would likely recognize and capitalize on it more quickly than any individual could ever hope to do. Furthermore, if basing profitable investment strategies on the near-term market conditions that “we all know,” the evidence would indicate that active investment managers would have better results than we’ve seen through the past many decades.

There’s some good news here for patient investors. Since study after study indicates that active managers in general can’t outperform after the costs involved, it seems clear that investing tactically is unlikely to add value beyond building a low-cost, globally diversified portfolio and adopting a simple “buy, hold and periodically rebalance” approach to maintaining it.

In short, patient investors seek to participate in rather than outsmart that which we all know about the market’s returns. Those who have the ability to use process and structure to their advantage can tune out the noise generated by others who feel they must react to statements that begin with, “We all know.”

So, the next time you hear someone begin an investment recommendation with, “We all know …” you may want to listen politely. But say this to yourself: “I know enough not to waste money altering my informed, long-term strategy, based on what we all know at the moment.” Remember that whatever “we all know” about today’s market conditions will be yesterday’s news soon enough.

Please feel free to email me with questions or visit our Evidence-Based Investing Website.




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About Chas Boinske

Charles P. Boinske, CFA, is a 30 year investment management veteran overseeing the strategic direction and portfolio management process for Independence Advisors, LLC. Have a question for Charles? CLICK HERE TO ASK CHARLES
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