Valuation-Informed Indexing #61: You Could Be Following a Get Rich Quick Investing Strategy Without Even Knowing It

<i>Valuation-Informed Indexing</i> #61: You Could Be Following a Get Rich Quick Investing Strategy Without Even Knowing It

by Rob Bennett

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I will never forget a comment that a fellow put to an article on the Bernie Madoff fund in the early days of the scandal. Someone had described the fund as a Get RIch Quick scheme. This was not fair, this fellow explained, He had invested with Madoff. He had made over $1,000,000 doing so.

Before we laugh, we need to look at our own behavior and consider whether we have ever been guilty of entertaining such logical fallacies. There have been hundreds of occasions on which I have explained why Buy-and-Hold is a Get Rich Quick scheme and people have responded that they have been following Buy-and-Hold strategies for years and are ahead of the game as a result.

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Get Rich Quick strategies always work for a time. If they didn’t, no one would invest in them. No one should be impressed to see a Get Rich Quick strategy produce good results for five or ten or even fifteen years. What matters is how you do in the long run. The problem with Get Rich Quick is that it never works in the long run.

There are millions of people following Buy-and-Hold strategies today. Are they dumb people? Are they bad people?

I sure don’t think so. They are people people.

There is something in human nature that causes us to be drawn to Get Rich Quick. This has been going on since the first stock market opened for business. It’s unfortunate. But it’s not something for which we should feel any particular shame. We are flawed humans just like all of the millions who came before us and just like all the millions who will come after us.

There are two important implications that follow from that last sentence.

One, we all need to work hard to try to understand the Get Rich Quick impulse. Since it lives within all of us, it serves no purpose to get self-righteous about this sort of thing. I’ve seen people get self-righteous re those taken in by the Madoff fraud. Those people were greedy. They got what was coming to them. You hear that sort of thing all the time.

It’s fear that causes us to react this way. What’s the first thing your mind jumps to when you hear of someone being killed in a traffic accident? You want to know if they were drunk or didn’t use their seatbelts. You want to hear that they did something you wouldn’t do. That makes you feel safe. That makes you feel that this horrible thing will not happen to you.

The reality is that people who did nothing wrong are killed in traffic accidents all the time. And good and smart people are taken in by Get Rich Quick investing schemes all the time.

No one deliberately invests his or her retirement money in a Get Rich Quick scheme. People are fooled. That’s what happens. And every human is born with the rationalization skills needed to be taken in. We all need to work on pointing the finger at others less often and at pointing the finger at ourselves more often.

Two, this Get Rich Quick inclination we all are subject to is the most important risk of stock investing. You don’t need to know about alpha or beta. You don’t need to understand inflation or dividends or compound interest. You don’t need to to study annual reports or cycles of the moon. You do need to be able to hold on to your common sense when people all about you are losing theirs.

But that isn’t easy!

It sounds like it would easy. But the Get Rich Quick impulse residing within each and every one of us trips us up more often than we are willing to admit.

We need to talk about the Get Rich Quick impulse a lot more than we do. It would liberate us from its power.

If we talked about it more, those who have been taken in by it would feel more comfortable accepting that they have messed up. A lot of the friction we have seen in investing discussions focused on the realities would dissipate.

And we would over time come to target our analytical energies on what matters instead of the silly, intellectualizing that is often treated with such deference in this field. Are there things we could do to protect ourselves from the self-destructive power of our Get RIch Quick demons? Of course there are. To learn what they are, we first need to work up the courage to talk frankly about the true risks of stock inverting.

We have met the enemy — and it is the Get RIch Quick urge that resides within each and every one of us.

Rob Bennett has ideas for how to make a late-start retirement plan work out well. His bio is here. 


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Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”
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