Jackass Investing: Don’t do it. Profit from it”, has been a Kindle best seller since its release in mid-2011. Written by 30 year hedge fund veteran Mike Dever, the ground-breaking and controversial book introduces several innovative concepts – proven over decades of trading – including the replacement of “asset classes” with “return drivers” and a risk-based portfolio allocation method to replace conventional portfolio diversification.
In it Mr. Dever exposes 20 common investment myths and we are presenting them here with an explanation of each. In his first installment Dever concentrated on general investment myths that have somehow become etched in stone in traditional investment circles. The second installment included myths that have helped to keep trend following strategies on the margin. Myths 11 through 15 touches on some general biases against futures markets and other myths than can harm your bottom line.
Myth #11: Commodity Trading is Risky
It will likely surprise most people to know that commodity prices are not more volatile than stock prices. Commodities can be risky though, when people put their money into long-only commodity funds. Failing to understand the return drivers for these funds (it’s revealed in the book), people think they’re getting a portfolio diversifier and inflation hedge. As this chapter shows, they’re getting neither.
Myth #12: Futures Trading is Risky
Fear of futures trading is as irrational as a fear of fire. They both can burn you if abused, but provide enormous benefits when properly used. In busting this myth I compare two indexes and let the readers decide in which they’d rather put their money. The answer’s pretty obvious, if unexpected. For anyone who’s ever told you that futures trading is risky, you’ve got to send them this chapter.
Myth #13: It’s Best to Follow Expert Advice
Learn how a common rat (the little creature with the long tail) was able to outsmart Yale students. The reason sheds light on the fatal flaws in experts’ decision-making processes. Interestingly, you’ll also learn that the experts who are most touted are the ones who are most wrong. As I state in the summary of this chapter, experts do however provide a great service to rational investors: they and their followers, by occasionally pushing markets out of line, present you with trading opportunities.
Myth #14: Government Regulations Protect Investors
In front of a group of investors in 2007 Bernie Madoff announced that, “In today’s regulatory environment it’s virtually impossible to violate rules and it’s impossible for a violation to go undetected.” Wow! Three years later Bernie announced that he had been running a Ponzi scheme for 20 years and defrauded investors of $50 billion – right under the noses of the regulatory watchdogs, and despite detailed warnings from industry professionals that he was a fraud. Incompetence of the regulators isn’t the only concern investors should have. There are numerous regulations in place that, in the name of protecting investors, cause them great harm. I give examples in busting this myth. Bottom line: you must protect yourself from bad investments. Regulators will certainly not do it for you.
Myth #15: The Largest investors Hold All the Cards
Stop the whining! Individual investors have been told so often that the ‘big guys’ have the edge that many of them have started to believe it. But’s it’s not true. In fact, the larger investors have numerous constraints on what they can put their money into. Some of these constraints are regulatory, some are due to their own bureaucratic policies and some are simply due to the fact that they are too big to participate in certain investment opportunities. I point this out and show a specific approach that individual investors can use to outperform the big guys 3 to 1.