Everybody Plays the Fool (Sometimes)

Back when I was in high school, an R&B group called The Main Ingredient, fronted by Cuba Gooding, Sr., scored a big hit with Everybody Plays the Fool.

Everybody plays the fool (sometimes)
There’s no exception to the rule (listen, baby)
It may be factual, it may be cruel (I ain’t lyin’)
Everybody plays the fool

So, so true.

Everybody does play the fool at least sometimes, about love and money. So, in honor of April Fools’ Day, here is a helpful list of ways nearly all of us play the fool about money (sometimes). Remember, there’s no exception to the rule (listen, baby).

1. We think we’re better than the norm at managing money or picking great managers. As long-time chair of the Yale Endowment Charley Ellis outlines it, research on the performance of institutional portfolios shows that after risk adjustment, 24 percent of funds fall significantly short of their chosen market benchmark and have negative alpha, 75 percent of funds roughly match the market and have zero alpha, while well under one percent achieve superior results after costs—a number not statistically significantly different from zero. Those are long odds. If you plan on trying to buck them, make sure your reasons for doing so are really, really good.

2. We fail to focus long-term. Hope is not a strategy and lunch is not a long-range plan.

3. Accordingly, we trade too often.

4. We are too afraid of volatility and thus stocks. If you don’t invest (enough) in stocks, you’re leaving a lot of potential money on the table.

5. We think that we’re somehow immune to the cognitive and behavioral biases endemic to all of us.

6. Our priorities are screwed up. As many investing mistakes as we make, our biggest problem doesn’t have anything to do with our investment choices at all. It’s that we don’t save enough. If we did, most of our investing mistakes wouldn’t really matter. Our second biggest problem is that we don’t care enough about costs. The leading factor in the success or failure of any investment is fees. In fact, the relationship between fees and performance is an inverse one. But we’ll spend many hours trying to squeeze a few basis points out of our asset allocation.

7. We don’t “follow the money.” Multiple studies all establish what we should already know. A manager with a significant ownership stake in his fund is much more likely to do well than one who doesn’t. Interest alignment is crucial. Even more fundamentally, we don’t make sure that every professional we hire is looking out for our best interest at every point.

8. We are remarkably susceptible to alleged magic bullets and get-rich-quick schemes, even when they are so obviously stupid that they seem fake. In the same way, we jump to try out “cargo cult” investing “solutions” (thank you, Dr. Feynman) — approaches, models and systems that are said to work somehow without adequate analysis, testing and safeguards. A data-mined but insufficiently authenticated “solution” will almost surely be a disaster for everyone but those collecting a fee for it (sadly, integrity can usually be purchased).

9. We try to time the market. The idea that an in investor ought to be aware and nimble enough to avoid market downturns and consistently to find and move into better investments is remarkably appealing. Just show me anybody who has done it repeatedly. Still waiting….

10. We don’t get help (or the right help). The key premise to the life’s work of the great Daniel Kahneman is that it’s much easier to spot the errors of others than ourselves. We should take advantage of that reality. We all need accountability and we all can use some good help (at least sometimes).

It may be cruel to say so (I ain’t lyin’), but everybody plays the fool.