“Simple Heresy”

Long ago I came to the conclusion that the best investment strategy is to invest only in things that you know very very well, and a close second is to invest in a market index fund. As I don’t want to take the time to study stocks and companies, a large part of my money is in the S&P 500 index.

Despite that, I still find it interesting to read about investing strategies and such, and this article drops a bombshell: it seems that sophisticated financial analyses don’t work as well as simply picking some stocks you think will do well and dividing your money evenly between them.

[…] The head of the firm’s investment department attended a recent lecture about the power of distributing money evenly among assets, given by psychologist Gerd Gigerenzer, director of the Max Planck Institute for Human Development’s Center for Adaptive Behavior and Cognition in Berlin. Skeptical but intrigued, the insurance honcho returned home and reanalyzed his company’s investments from 1969 to 2009.

To his surprise, a 1/N portfolio would have made more money in that time than any of the complex strategies that his department had employed. Naïve diversification requires periodic reassessments of which stocks and other assets to include in a portfolio. Yet regardless of how the insurance official realigned the portfolio, 1/N came out ahead. […]

The KISS principle is alive and well. 🙂 I imagine that there are a number of fund managers and financial analysis software companies that wish the article had never been published. 😉


  1. Don’t ask me about investing, I recommended PALM. #-) (Though after the merger, it at least broke even, and I didn’t recommend HP in turn. 🙂 )

    • Palm was a good buy at one point. When the original founders left, their MBA-toting replacements drove it into the ground. That’s the kind of thing you have to keep track of if you’re going to invest in individual companies, especially high-tech ones — the original founders generally know what they’re doing, but few people with an MBA would, so when the founders leave, it’s time to watch carefully and be ready to bail out at the first sign of management incompetence.

      • I recommended them when I heard about webOS, shortly before it was announced, in IRC from Palm employees. I knew that they were in trouble, I thought webOS would save them though – and it was even better than I thought it’d be and it didn’t.

        Speaking of founders, founders don’t always know what’s best. Look at RIM for an example of that, though the dummy who’s replaced them is just as bad.

        • Yes, webOS was too little, too late. Which is too bad, because it looked like it was technically pretty good.

          I don’t count RIM as a high-tech company. As I understand it, their only technological advantage was instant “push” e-mail; otherwise their technology is pretty dated. Since “push” has hit mainstream, they’ve been coasting on their former popularity with their business customers, which they recently realized was a poor strategy since the iPhone and Android devices are now eating their lunch.

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