Finance can be a very backwards industry. I understand why so many people outside the world of finance don’t understand what it is that goes on in our industry because many of the things that people believe or do just don’t make any sense. Here are ten of them:
1. People in finance believe that when the stock market trades fewer shares (lower volume) it’s a bad thing. They actually want people to overtrade long-term assets in the short-term.
2. People in finance run backtests on investment strategies that go back multiple decades into the past and then obsess over monthly performance numbers.
3. People in finance consider it bad news when the savings rate rises and more people actually start planning for the future.
4. People in finance spend their time trying to figure out why the market was up or down on a daily basis even though we still have no idea what the main culprit was for the Crash of 1929 or the Black Monday crash in 1987.
5. People in finance who are wrong nine times out of ten are still referred to as ‘gurus’ or experts’ and heralded as prescient soothsayers for being right once in a row.
6. People in finance refer to those with more money to invest as ‘accredited’, ‘sophisticated’ or the ‘smart money’ even though these larger pools of capital make the same basic mistakes as every other mom and pop investor out there.
7. People in finance believe that Black Swans — events that are completely unpredictable — can be forecasted on an annual basis. And if they aren’t predicted ahead of time then finance people will surely convince themselves that they “almost” or “kind of” predicted the unpredictable.
8. People in finance assume that you get what you pay for — that paying a higher fee will result in better after-tax, after-cost performance.
9. People in finance typically feel terrible about their performance when the market is rising but they’re trailing their peers or their benchmark. And they feel great about their performance when markets are falling but they’re beating their peers or their benchmark.
10. People in finance believe that advice has to be complicated to be effective.
Unfortunate Realities of the Investment Business