The Globe and Mail, Report on Business, Guest Column
Published September 2nd, 2006

If I had to choose one word to describe the investment industry, I'd pick ‘perverse’. It is like no other industry I know.

That word came to mind early in my career when I found myself hanging around with bond fund managers. I realized that these people were happiest when the economic news was the worst. When it came to bond prices, bad news was good and good news was bad.

At first, I thought it was only bondies who couldn't cheer for the home team. At least us equity guys could celebrate good news and enjoy a period of economic growth and strong earnings. But as the years have gone by, I've come to realize that the bond guys weren't alone. The whole business is wacko.

I tell this story because I think it illustrates one of the biggest struggles that non-professional investors have. Too often they don't realize that things are not as they appear. Indeed, the reality may be the exact opposite. A former colleague of mine, Ian Mottershead, liked to say, “If it appears obvious, it is probably untrue.”

We see it time and again when economists or analysts all line up on the same side of an issue. Invariably it turns out that they were looking in the wrong direction. The overwhelming consensus from economists in the U.S. a month ago was that the housing market will experience a soft landing and nobody will get hurt. Look out below.

That is different from the real world. If you find that same consensus when you're looking to buy a car, you're delighted. If Consumer Reports, Car & Driver and your colleagues in the staff room all think the Honda Accord is a great car, it probably is. On the other hand, if multiple publications and lots of people (including taxi drivers, hair dressers and fitness instructors) tell you that something is a great investment, you'd better run for the hills.

At the core of this perverseness is the concept of time frame. An Accord is all about the here and now. The ride, the comfort, the acceleration, and for me, the sound system. Investing is about what lies ahead. Putting a stock or mutual fund in your portfolio does nothing for you today. It is all about a future stream of income. Investors often have trouble making the distinction between the two.

This time frame issue is something that we have to struggle with constantly. We are barraged with short-term information. It's in front of us all the time and hard to avoid. And because it is so plentiful, it takes on an undue aura of importance.

Indeed, some people get pretty good at analyzing short-term events like interest rate moves by the U.S. Federal Reserve or quarterly earnings. But as Charlie Munger (Warren Buffet's side-kick) says, “If something isn't worth doing, it isn't worth doing well.” The fact is, the here and now has little or no value when it comes to generating long-term returns.

Unfortunately, the good stuff (a sound assessment of the long-term fundamentals) is harder to come by and has no guarantees attached. It's just educated guess work. For every expert who tells you that the outlook for a company or industry is good, there is another who can tell you why things will turn out badly. Both views will be well reasoned and convincingly presented.

So what is one to do? How does a normal, well-balanced person successfully navigate through the perverse world of investing. First of all, accept the fact that the investment business is perverse.

Second, get suspicious when everyone is talking about the same things and thinking the same way.

Third, don't pay too much for good news of the past or predicted success for the future.

Fourth, always stay diversified so you're not totally caught off guard by the unexpected. In the words of Peter Bernstein, one of my favorite analysts: “if you are comfortable with everything you own, you're not diversified”.

And finally, pray for bad news.