Planting a tree, not hiring a coach

We’ve been told over and over by the traditional financial services industry to look for the best investment.

In our search for the best, we often use past performance.

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Doing so makes sense since we rely on past performance for other decisions.

For instance, if a university needs a new basketball coach they start by reviewing a coach’s track record.

Do they win more than they lose?

 However, in a crazy paradox, selecting an investment manager using past performance may not be the best choice. 

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But how is this possible?

Hiring someone who performed terribly makes little sense.

Even using a disciplined process and the best data we can find, “smart” activity often creates a behavior gap.

The reality is that even if you own a mediocre investment, but if you behave correctly (sometimes that means doing nothing), you’ll outperform 99% of your neighbors.

In the end, successful investing is more like planting an oak tree than hiring a basketball coach.

You never plant a tree and then pull it out every time the wind blows just to check the roots.

This simple, but not easy, approach reminds me of Warren Buffett who said:

“Benign neglect, bordering on sloth, remains the hallmark of our investment process.”

Depositphotos 176436040 S 2015Based on many conversations I’ve had, this attitude feels wrong.

It seems like a contradiction to the Protestant work ethic.

If something isn’t painful or hard, it’s not worth doing.

But when it comes to investing, we’re dealing with a different animal.

Once we’ve made a decision based on our personal goals and plans, often the best thing we can do is practice benign neglect.

Simply do nothing, even though it feels wrong.

Try it. I think you’ll find that trees grow much better when you stop looking at the roots all the time.



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About

Carl Richards is a Certified Financial Planner and a columnist for the New York Times, Morningstar magazine and Yahoo Finance. He is author of 2 books, The Behavior Gap & The One-Page Financial Plan. Carl lives with his family in Park City, Utah. You can find his work and sign up for his newsletter (which has an international audience) at www.behaviorgap.com/


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