The Iconoclast Investor

As a young investor many years ago, I used to read and watch everything I could that related to the stock market, and even the financial markets in general.  I was a huge sponge, eager to sop up information and opinions, no matter how good, bad or biased it might be.

Eventually, however, as I began investing on a more regular basis–i.e., I actually began working and had more money to invest–I took a step back and examined my habits.  Here I was, listening to pundits on TV and reading about opinions online, listening to people who were clearly very smart and well-spoken.  But many of them were doing no better than the average investor.

I say that not to throw stones; heck, all of us in the investment business live in glass houses.  My point is that even these knowledgeable professionals, who understood and could explain the inner workings of the stock and credit markets … had trouble making good money in the stock market.  And that, after all, was my goal.

All of this brings me to this week’s tumultuous events–Lehman’s failure, AIG’s bailout, Merrill’s sort-of bailout, and now the worries about Morgan Stanley, Goldman Sachs and whether the investment banking industry as we know it is about to go up in smoke.

I spent 20 minutes yesterday reading the Wall Street Journal’s front-page articles, but still can’t say I understand in full the entire credit swaps/mortgage securitization/collateral backing issues that are affecting the financial world.  (Then again, you could argue that the CEOs of these firms didn’t have a firm grasp on all they owned … but I digress.)

Yet, if anything, I believe NOT knowing all the details and ins and outs can be a good thing for you, the investor.  How so?  In real life, the smartest guys often get the best jobs and have the best careers.  Yet in the market, the smartest guys often go belly-up when “once in a lifetime events” (which are happening every five years or so these days) cause their models to go awry.

My point is this: Knowing the nitty-gritty of the financial world is not what it takes to be a great investor.  That’s just not how the world works.  The best investors keep it relatively simple and stick to systems that have been proven for years.  Those systems are based on how the market actually works, as opposed to reacting and mulling over the latest crisis.

So don’t be too eager to delve too deeply into all the nitty-gritty of the financial world.  While it may help you feel smarter, it’s not going to help you be a better investor.