Why Common Sense can be more valuable than an MBA
Aug 25 2009
“Everything in war is simple,” said the Prussian military strategist Karl von Clausewitz. “But,” he went on to say, “The simplest thing is difficult.” The same holds true for investing. The rules for successful investing are very simple – “Buy low, sell high” for example. It’s in the execution where things get a little tricky.
I have found that investors are much better served by applying simple rules of common sense we (should have?) learned as children than by following the advice of some current investment guru. These rules are part of what I call The Not-So-Secret Secrets of Successful Investing (future posts will feature other “not-so-secret secrets”).
We all know these rules but can easily ignore them when distracted by more compelling psychological stimuli – greed and fear being the top two.
Case in point: Bernie Madoff. Bernie “fooled” experienced investors, professional money managers, the SEC, (the list goes on) using a simple Ponzi scheme. His operation was not all that sophisticated. He simply promised regular, better-than-average returns without any risk. And he consistently provided those returns right up to the moment the whole thing blew up and everyone lost their money.
All of those sophisticated investors who gave Bernie money knew, in their heart of hearts, that “If it seems too good to be true, it is.” Unfortunately, human nature makes it difficult to follow that rule when we think we have found a sure thing. Nevertheless, by applying simple common sense to the once-in-a-lifetime opportunities offered by scam artists like Bernie Madoff, investors can save themselves a considerable amount of grief – and money. But, as Clausewitz reminds us, just because it’s simple doesn’t mean it’s easy.
