For Christmas I received Bruce Springsteen’s autobiography Born to Run. Not because I especially like Bruce Springsteen, but I’d heard it was a great read. It is. Right now I’m learning about the early stages of his career. It’s what you’d typically expect: poverty, partying and hard work. He’s tasted a bit of fame at this point in the book, but mostly it’s been setback after setback. Fortunately, we already know that in the end things work out pretty well for The Boss.
But success is loud, and failure is silent. It’s the success stories we most often hear. We don’t hear much about the ones that don’t work out.
Here’s another example, as told in Jordan Ellenberg’s book How Not to Be Wrong: The Power of Mathematical Thinking. In World War 2, Mathematician Abraham Wald was asked to figure out which parts of American fighter planes should be more heavily armored. It’s a problem because while armor is protective, it also makes planes harder to manoeuvre. He was given statistics from the military showing that the planes coming back from Europe had more bullet holes in the fuselage, and not as many in the engine. Wald had a simple and elegant insight: the reason the planes didn’t have many holes in the engine is because the planes with holes in the engine never made it back. The ones with holes in the fuselage did. Success was loud, and the ‘failed’ planes – the forgotten ones that were key to the analysis – were silent. Until Wald gave them voice. Extra armor, it was decided, would go on the engines.
It’s this type of thinking we have to apply when we hear about successful investing strategies. I read a persuasive article about a strategy called BTSX – “Beating the TSX”. The BTSX strategy involves ranking the stocks in the TSX 60 from highest to lowest dividend yields and then investing equally in the top ten. The results are intriguing as the strategy has indeed outperformed the index over the past 15 years. I thought about the BTSX for a long while. It’s simplicity and common sense appealed to me. I considered giving it a try, at least with part of my portfolio.
Then I remembered about the planes. And Bruce Springsteen.
It’s only when something succeeds that we pay attention to it. The military only kept statistics on the planes that succeeded in coming back. Bruce Springsteen is able to write a novel about his life because he is now a famous musician. If BTSX wouldn’t have worked, there would be no article about it.
To quote Jonathan Clements from The Humble Dollar:
To be sure, there are investment heroes who beat the odds and come out on top. Berkshire Hathaway Chairman Warren Buffett, with his five-decade record of beating the market, is probably everybody’s favorite example. But in many ways, this is the power of anecdotal evidence: We remember big lottery-ticket winners, whose smiling faces make the evening news. We forget about the millions of losers, because they’re never mentioned.
I don’t know how BTSX will perform in the future. Maybe it will end up beating the TSX index for all time! But maybe not. And it doesn’t matter, because investing is done best by sticking to a well-diversified asset mix that considers your goals, time frame, and risk tolerance. And for me, the BTSX strategy does not fit that bill.
So when you hear about about hot stock, a sure-fire investment strategy, or a friend who doubled her investment portfolio last year, remember to think critically. Building wealth is not about finding the secret to beating the stock market. It’s about having a plan, saving regularly, making sacrifices, diversifying properly, respecting your risk tolerance, and committing to an asset mix that suits you.
Ugh, that sounds so boring when you put it that way! Better go see what The Boss is up to in his book; it’s likely something more exciting.