Arrogance Parading as Humility

A recent Washington Post article argues that: “Humans, no matter how hard we try, act in ways that cause us to make the wrong investment decisions almost all the time.”

I like the lyrics but not the melody to which they are attached.

The guy writing the article describes how he made a poor investing decision. He looked into Behavioral Finance and concluded that his problem is that even the smartest among us are not capable of making good investing decisions, that “when it comes to investing, people aren’t that smart.”

That’s dumb.

Some of us are not capable of smart investing. Some of us are. Why the generalizations? Those of us who are not as smart as some should be trying to learn from those who possess the edge, not denying that it exists to save our pride.

The fellow is on the right track. The Efficient Market Theory is the past, Behavioral Finance is the future. I think he takes a wrong turn, however, when he concludes that: “I’m going to push the money into an index fund.”

It’s not that that is a bad decision. Index funds are a good thing. The fellow who wrote the article probably belongs in an index fund. Most of us probably do. All that is fine.

All that is humble. That’s why it is fine. If you don’t know how to pick stocks effectively, you shouldn’t be trying to pick them.

What gives me the creeps about the article is the suggestion that none of us can pick stocks effectively. I’ve not seen any convincing evidence that this is so. I’ve seen lots of people say it, but I’ve never seen anyone make an effective case. What appears to me to be going on is that many people have quite properly concluded that they cannot pick stocks effectively and have jumped from that bit of useful self-knowledge to the unwarranted conclusion that no one else can pick stocks effectively either.

That’s not humility. That’s arrogance. That’s arrogance parading as humility.

No one can pick stocks effectively? No one? There are millions doing it. There have always been millions doing it.

Let’s say that it is 20 percent of the investing population that possesses the skill needed to pick stocks. Is it the right thing for the 80 percent who do not to pretend that no one possesses this ability? I sure do not think so.

If you stop picking stocks because you lack the ability but acknowledge that others possess this ability, you leave open the possibility of gaining this skill somewhere down the line. Pretend that since you can’t do it, no one else can either, and you doom yourself to a lifetime of indexing. Why? For what purpose?

To flatter yourself. That’s what is going on here. The people who promote indexing noticed that it goes against human nature to be humble and so many who do not possess the skill needed to pick stocks do not want to admit that they there are others who do. So we are told stories, we are assured that there are “studies” showing that no one can pick stocks effectively. We hurt ourselves by believing in those stories. It’s a small-minded thing to do.

Indexing is wonderful. It is the right choice for the majority of investors. It’s not the only choice, it need not be a forever choice. There are a good number of investors who can enhance their returns by putting their experience and knowledge to use picking stocks effectively.

As a promoter of indexing, it embarrasses me that a good number of my fellow indexing promoters feel that they need to overstate the case for this investing approach. Indexing is good just as it is, without the overreaching.

Indexing works. But it is not the only thing that works. I wish that indexers would stop arguing that it is. The message that I hear when they do so is not “I’m so humble that I can admit that I cannot do something” but “I’m so arrogant that I cannot admit that there are many who possess a skill that I do not now possess.”

Index while you learn. But don’t buy into flattery that causes you to give up on the learning process. The rational and emotionally healthy investor indexes for so long as indexing is right and graduates to effective stock picking when that becomes the better choice. You don’t have to choose teams and wear the indexing jersey for life or the stock-pickers jersey for life. There is a time and place for every good investing approach under heaven.

Today’s Passion: The Income and Dividend Investing board is discussing Why Do People Ignore Valuations?


  1. Rob says

    I find that many of the “experts” who put themselves forward as being focused on the long-term are in reality not so focused. For example, people still refer to “bulls” and “bears.” I don’t see how these terms apply for true long-term investors. A bull is someone who thinks stocks are going up over the next year or two, the short term. A bear is someone who thinks stocks are going down over the next year or two, the short term. For true long-term investors, the bull/bear distinction is not terribly meaningful.

    My take is that we are in a transition period. People have come to understand the problems with having a short-term investing focus. But not too many have yet thought through what it means to pursue long-term strategies in the real world. We haven’t been doing this long enough to yet appreciate all the changes in thinking that are needed to make the transition to a new way of investing.

    Switching from a short-term focus to a long-term focus changes a lot.


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