Timeless investment lessons from Ben Carlson
If you haven’t seen Ben Carlson’s new book, Risk & Reward: How to handle market volatility and build long-term wealth, you should pick up a copy.
Carlson hosts the popular A Wealth of Common Sense blog (I am a long-time reader) and the Animal Spirits podcast, and is also Director of Institutional Asset Management at Ritholtz Wealth Management.
Risk & Reward surveys over 100 years of market history, with particular emphasis on the Great Depression, the hyper-inflation of the 1970s, the dot-com bust and the Great Financial Crisis.
It’s a story of boom and bust, but for investors it’s a story about how patience, a long-term mentality and a thorough understanding of your willingness to bear risk are the key ingredients in creating long-term wealth.
It’s a familiar story, but it bears repeating, because the essential investing lessons seem to be forgotten with every new generation, which always produces a substantial minority who believe they have figured out how to beat the markets.
Of course, we know they are confusing the difference from being in an up market with the mistaken belief they are investing geniuses.
Regardless: these lessons are especially valuable now, because the average investor, especially younger investors, are bombarded with more choices and more ways to gamble their money away than ever before, particularly with the explosion of the options market, blockchain and cryptocurrencies, and now prediction markets.
Given the confusion of choices, what core investing principles should every investor embrace?
Carlson says every investor should understand their:
Risk profile: their willingness, need and ability to take risk, which includes an understanding of their emotional disposition, especially the extent to which they are affected by fear and greed;
Time horizon: how long their assets will be invested; and
Investing goals. Where they want to be in the future.
Carlson concludes with “20 Things I believe about investing”, which is a useful summary of a broader set of investing principles.
Carlson believes:
Simple beats complex.
The timing of buy and sell decisions matters less than the holding period (it’s time in the markets, not timing the markets).
Investors should ignore what billionaires and legendary investors say about the markets (they don’t share your risk profile or investment time horizon)
Self-control can make you far more money than just about any other trait as an investor.
It’s basically impossible to forecast the economy.
It’s much easier to explain what just happened than predict what will happen next (hindsight bias).
Fighting the last war can get you into trouble (the next risk is rarely like the last risk).
Every investor has their own behavioral blindspots.
A long time horizon is the ultimate equalizer in the markets.
Nothing is the best investment decision most of the time (as Jack Bogle used to say, “Don’t just do something, stand there.”)
Most investment advice is nearly impossible to accept during boom and bust times (no one wants to hear about the downside when the markets are still topping).
Optimists are better investors than pessimists.
That last point is critical. Capitalism is not a religion, but it is a belief system. When you are investing long-term there is an implicit belief that corporations will continue to make money and share those profits with investors.
It is an implicitly optimistic belief: if you don’t believe that the economy can deliver, or that corporations will share the profits, there’s little point in investing.
Carlson has been dispensing this kind of folksy but fact-based investing advice for a long time, and he has amassed a loyal cadre of readers and listeners.
I count myself among them. You should too.
