I mentioned this to Rogers because he was pushing the benefits of investing in commodities back in 2005 and pointed out that it is a lot easier for a retail investor to learn the fundamentals and trade commodity markets than equities. He was annoyed with the Wall Street analysts who were always ready to push a stock to buy on the fundamentals in the commodity markets. For stock guys, the bull market in commodities meant they needed to find the right commodity related stock. His point — like many of Dever’s — was obvious yet controversial because of conventional wisdom. If you think gold is going up, don’t look for the right mining stock, buy gold. Sounds simple enough but thousands of investors at the time were looking for the right mining stock to buy simply because the thought gold was going up. Or the right energy firm to buy because they thought crude would rally. I recalled that conversation with Rogers a few years later when a major South American copper mining firm went into bankruptcy in the middle of the one of the greatest copper rallies of all-time. I recall thinking about how many investors must have been wiped out and how many of them probably only invested in the firm because they correctly believed that copper would rally.
What is great about <em>Jackass Investing </em>is its dependence on logic. Why do investments work and why they don't. What drives profits? If you take nothing else from the book but the importance of not automatically subscribing to the conventional wisdom of the day, it would be well worth the read.
The most important point Dever explains is the concept of return drivers. To be truly diversified, you need to be invested in products that have different returns drivers.
Managed futures is so compelling because high volatility and price dislocation, things that hurt many different asset classes, are environments where trend followers tend to thrive in.
I recall Salem Abraham, founder of Abraham Trading, explain this several years ago. The simple point he made shortly after managed futures was the only asset class to produce returns — and they were extraordinary returns — in 2008, is that so much of what people invested in was dependent on a strong economy and a stable credit market.
What you need is something that can produce returns in relatively normal periods but more importantly have a strategy that produces strong returns that are driven by disruptive events that tend to have a detrimental effect on most other investments.
I noted in my introductions that the first group of myths related to general long equity investment propaganda; the second group of myths related to the stubborn failure to recognize the value in trend following; the third group related to biases against futures trading in general and the fourth group explained why return drivers need to replace asset classes as a means to diversify and points out that by doing so you can achieve a “free lunch.”
One last myth slayed.