The George Costanza Approach to Investing
Accepting we know nothing, is the first step on the path to rational investing
“My life is the opposite of everything I want it to be. Every instinct I have, in every of life, be it something to wear, something to eat... It's all been wrong.”
—George Costanza
One of the best episodes of Seinfeld is when George realizes that he knows nothing—about anything—and that the easiest way to make better decisions is to do the opposite of what his instincts tell him he should do.
When it comes to investing, a lot of people could make a lot more money if they embraced the fact that they know nothing and, in turn, do nothing.
Next time you feel the urge to time the market or speculate with your investments, ask yourself, What Would Costanza Do? (WWCD)—do the opposite of tinkering with your portfolio; do nothing.
Expectations vs expected returns
A 2014 research paper titled "Expectations of Returns and Expected Returns" provides a compelling look at how investor expectations square up—or, as it turns out, don't—with forecasts of expected returns in the stock market.
The study sifts through data from six different investor surveys conducted between 1963 and 2011, which asks what investors think the stock market will do next.
Now, if you’re a long-time reader, you know I often emphasize that predictions about what will happen to the stock market in the future are one of the most useless exercises you can pursue. This study reinforces that sentiment, revealing a striking pattern: investor expectations tend to reflect past market performance rather than a rational assessment of the future.
If the stock market has done well recently, investors expect it to keep doing well. Investors expect the market will continue to be lousy if it has been lousy lately.
The researchers found a strong negative correlation between what investors believed would happen in the stock market (expectations) and what financial models, grounded in factors like dividends and market valuations, predict (expected returns.)
When investors are bullish, expecting high returns, the expected returns based on real-world market conditions are often low, and vice versa.
Vibes-based investing is as rational as buying or selling stocks based on your astrological sign.