Dirty Harry and the Hidden Truth

Brett

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Brett Simpson

Financial Advisor & Chairman

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About 50 years ago, a savvy and streetwise “Dirty Harry”, famously played by Clint Eastwood, said a profound truth: “A man has to know his limitations.” I know mine. I can’t predict the future. Sure, there’s others, (that my wife occasionally reminds me of), but knowing that I can’t know how the future will unfold is often an elusive truth for many smart men and women.

Smart people take all the data they come across (internet, media, word of mouth, even Twitter) and build a cognitive model about what they think will happen with a high degree of certainty. Unfortunately, this Confidence Bias leads to behaviors that are not outcome-optimizing.

Take for example, three decades of Dalbar studies showing rolling thirty-year investment performance periods of stock markets. The S&P 500 had an average recent return of about 10.2%, yet investors achieved only a fraction of that (4.2%). Despite what some commercials would imply, that difference is not costs, it is human behavior, self-selecting inferior outcomes by trying to time exit and entrance to markets.

In the words of legendary investor, Peter Lynch, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves”.

I get asked: “What do you think is going to happen to the stock market?” While I count myself as smart, (I know it will go up and it will go down), I just don’t know when and by how much. I do know that no one knows that, no matter how smart they seem! Some day traders and “Artificial Intelligence” based algorithms can’t see past their own programmed confidence bias. If anyone could predict the future with any reliable certainty, they would not waste time investing, they would just place bets. Predicting the un-predictable is a poor bet that the house always wins in the long run.

Lynch said: “If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” You need good research to invest in any company, and therefore any market, but you also need the patience “to stand by your stocks as long as the fundamental story of the company hasn’t changed”. Informed optimism understands that quality companies take labor and raw materials and actively create goods that people want. They earn profits that they return to the owners who invested despite uncertainty. Buying superior companies at a discount is common sense. Why would anyone want to sell their carefully acquired bargains because the overall market, inflated by glamour stocks and passive investors, appears expensive? You shouldn’t.

In the middle of all the market turmoil, some companies, in some geographies still represent good value. Dirty Harry would say: “You have to ask yourself a question…, do I feel lucky? Well, do you…?”

Yes, I’m a well-informed optimist!






Brett Simpson, BComm CFP CLU ChFC RHU is a Financial Advisor with RGF Integrated Wealth Management. The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.