I have no dog in either of those two hunts, I do not own ETF’s or Mutual Funds. I think more efficient systems like Morey’s and Indexes win for very clear reasons – better math.
But, the smartest ideas attract crowds. The very origin of the sports analytical movement was written about by an ex-Wall Street guy and fantastic storyteller, Michael Lewis in Moneyball. The un-crowded key was not just better data but specifically finding the better data that was under-analyzed by others. No investing book does a better job, in my mind, highlighting the advantage of un-crowded analysis. It has been reported that when Lewis spoke to John Henry, owner of the Boston Red Sox, he offered to pay Lewis NOT to publish the book. Seasoned from a remarkable career trading futures contracts on Wall Street, John Henry knew better than most that once inefficiencies in quantitative analysis are discovered, your edge erodes. In economic circles it is called the Goodhart principle, which states that when a measure becomes the target it ceases to be a good measure.
Bridging sports and investing again recently, Michael Lewis discussed active and passive investing. “There was a shift away from the intuitive judgment of experts. The move of active management inflows to passive management is one of the great changes that has swept the investor world since I stepped foot in the business. In the extreme no one is making judgments.” Liar’s Poker, The Big Short, and Flash Boys are among his portfolio of remarkable books of Wall Street extremes.
I think short-corner 3’s and indexing are wonderfully efficient locations, let me be clear. They are historically efficient solutions that completely changed each marketplace. But, I think the two-pointer is now underestimated in both shots and stocks.
To me, the Mikan drill in the Stock Market is ownership of a good old-fashioned common share of stock to collect a dividend. Over and over, with right and left hands. Taking your shots from lower-risk locations is easy. What’s hard is ignoring the crowds gathering at higher payoffs around the 3-point arc of other investment possibilities.
Only what is made real in the form of a dividend, in your hands as a shareholder, is what I call your Mailbox Math. The peace of mind that arrives from zero concern about shooting for any alpha while walking to the mailbox to collect those dividends, others have called their championship of 'aha' moments. Zero stock price appreciation is factored in, planned for, or worried about, at all.
One of the great things about this Mikan drill in the Stock Market is you do not have to be very innovative to focus on Mailbox Math. By definition, you do not step outside for deep shots. You can miss all the explosive opportunities that most investors dream of.
Let me give you an example. It was 1996, and the Chicago Bulls were about to win their second of three straight championships. Your humble mathlete here was building retirement plans at a large Wall Street brokerage firm.
My car eased over the giant crack in the driveway from a tree root. I walked up to the smallest and oldest house, by far, on the street. The new big homes all around, had very few trees left to worry about any deep roots. Inside, the unfashionably low ceilings brought sounds from the stereo and smell from the coffee pot a bit closer. Nobody described the scene any better than Thomas Stanley when he wrote, “We began studying how people became wealthy. Initially, we did it just as you might imagine, by surveying people in so-called upscale neighborhoods across the country. In time, we discovered something odd. Many people who live in expensive homes and drive luxury cars do not actually have much wealth. That small insight changed our lives.” – The Millionaire Next Door.
My host greeted me with a hug and walked me into the living room where meticulously laid out, end to end, were rare artifacts called common stock certificates. Yellowing from decades gone by and their corners turning up, we did not touch them. We just sat and visited. There was a great story attached to each, and I was in Stock Market heaven just listening. The brokerage firm expected me to conclude the meeting by carefully grabbing those shares like Indiana Jones in Raiders of the Lost Ark, and in one motion quickly replace that pure gold with a bag of sand from some Wall Street manufactured product.