Stordahl Capital Management’s Evidence-Based Investment Insights: 12 Essential Ideas for Building Wise Wealth
Are you ready to become a better investor? Would you like to learn more about the most essential principles driving wealth creation and preservation without hurting a bit?
Welcome to Evidence-Based Investment Insights:
12 Essential Ideas for Building Wise Wealth.
Each insight will take only a few minutes of your time. In exchange, you’ll learn how to invest with greater confidence—with evidence, not emotion, guiding your way. That’s because our insights are based on a dozen solid principles formed by 70+ years of peer-reviewed inquiry into how capital markets efficiently and effectively deliver enduring wealth to patient investors.
Don’t worry, unless you specifically ask us about it, we’ll skip the Greek symbols and multi-factor modeling. Instead, we’ll translate each insight into its meaningful essence: the “What’s in it for me?” you need to know, so you can apply the science of investing into your own portfolio.
Being a better investor doesn’t mean you must have an advanced degree in financial economics, or that you have to be smarter, faster, or luckier than the rest of the market. It means:
Knowing and heeding the insights available from those who do have advanced degrees in financial economics.
Structuring your portfolio so that you’re playing with rather than against the market and its expected returns.
Avoiding your own most dangerous behaviors, ingrained through eons of evolution, and tempting you to make the worst financial decisions at all the wrong times.
Each week, we will publish one insight for you to review. Are you ready to begin building your wise wealth accordingly? We invite you to read on.
Insight #1: You, the Market, and the Prices You Pay
When it comes to investing (or anything in life worth doing well) it helps to know what you’re facing. In this case, that’s “the market.” How do you achieve every investor’s dream of buying low and selling high amidst a crowd of highly resourceful and competitive players? The answer is to play with rather than against market forces, by understanding how market pricing occurs.
The Market: A Working Definition
Technically, “the market” is a plural, not a singular place. There are markets for trading stocks, bonds, commodities, real estate, and more in the U.S. and worldwide. For now, you can think of these markets in aggregate as a single place, where participants from all around the globe compete against one another to buy low and sell high.
Granted, this “single place” is enormous. It represents a huge number of participants who are individually AND collectively helping to set fair prices every day. That’s where things get interesting. To see how markets work, This video explains how security prices are set and how they change based on the collective knowledge of buyers and sellers.
With this information, investors will better understand how and why markets work.
Group Intelligence: We Know More Than You and I
Before the academic evidence showed us otherwise, it was commonly assumed that the best way to make money in seemingly ungoverned markets was through a “lone wolf” approach known as traditional active investing.
To succeed, a traditional active investor seeks to become an expert at forecasting market pricing, so they can successfully pick stocks (pick/avoid future winning/losing stocks), and time the market (enter/exit ahead of rising/falling markets). In so doing, their goal is to earn higher returns than markets are expected to deliver “passively,” to anyone participating in them.
Unfortunately, this outdated approach to beating the market is inherently flawed. A simple jar of jelly beans shows us why. Academia has revealed that the market is not so ungoverned after all. Yes, it’s chaotic when viewed up close. But it’s also subject to several important larger forces.
One of these is group intelligence. The term refers to the notion that, at least on questions of fact, groups are better at consistently arriving at correct answers than even the most competent individuals in that same group … with a caveat: Each participant must be free to think independently, as is the case in free markets. (Otherwise, peer pressure can taint the results.)
Writing the Book on Group Intelligence
In his landmark book “The Wisdom of Crowds,” James Surowiecki presented and popularized an enormous body of academic insights on group intelligence.
Take those jellybeans that we saw in the video above. Despite widely varying guesses, the group’s aggregated average guess came relatively close to the actual number. Similarly, structured experiments have been repeated under various conditions. Time and again, the group consensus was among the most reliable counts.
Now, apply group wisdom to the market’s multitude of daily trades. Each trade may be spot on or wildly off from a “fair” price. Still, the aggregate average incorporates all known information contributed by the intelligent, the ignorant, the lucky, and the lackluster. These current prices set by the market are expected to yield the closest estimate for guiding the market’s next trades. It’s not perfect, mind you. But it’s the most reliable estimate in an imperfect world.
Your Take-Home
Understanding group intelligence and how it governs efficient market pricing is a first step in more consistently buying low and selling high in competitive markets. Instead of believing the discredited notion that you can actively outguess the market’s collective wisdom, you are better off concluding that the market is incredibly efficient at its price-setting job. Your job then becomes efficiently capturing the returns that are being delivered.
If you want to discuss this concept further, we offer a complimentary 15-minute call to discuss your concerns and share how we can help.
This information should not be construed as investment, tax, or legal advice. This commentary reflects the personal opinions, viewpoints, and analyses of the Stordahl Capital Management, Inc. employees providing such comments and should not be regarded as a description of advisory services provided by Stordahl Capital Management, Inc. or performance returns of any Stordahl Capital Management Inc. Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this piece constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Accessing websites through links directs you away from our website. Stordahl Capital Management is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve of or endorse the information provided. Users who gain access to third-party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from the use of those websites. Please note that trading instructions through email, fax, or voicemail will not be taken. Your identity and timely retrieval of instructions cannot be guaranteed. Stordahl Capital Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.