How to become a better investor
The untold story of Lester Moore
In this article I’m going to show you why investment performance and investor performance isn’t always the same. In fact, industry studies repeatedly show that investment performance usually outpaces what individual investors receive by anywhere from 3 to 6 percentage points over longer periods of time. And that difference makes all the difference when you’re trying to make your money grow. I’ll talk more about that and how investor behavior regularly gets in the way of success in another article, but today I want to illustrate this point by telling you a little story.
This is the story of Lester Moore. Lester, or Less as most of his friends called him, was a stock trader on Wall Street back in the 1920’s. When the market crashed in 1929, Less and a lot of his Wall Street buddies lost their jobs. Of course, that market crash was the beginning of the great depression and that devastated millions of Americans financially.
Less was no exception to this and things got so bad for him that there times he could barely rub two nickels together. So, as he sat pondering his future and trying to pass the time, he noticed something interesting. Less would sit there and flip those coins. And, as he did, he found that could predict with remarkable accuracy the outcome of those coin flips successfully.
So, with his research background and analytical mind, he began noticing the difference that air pressure, humidity, and altitude made on his predictions. He began experimenting to see if flipping it with his left hand vs. his right hand improved his odds of success. And he even tested different metals to see if a silver coin was more predictable than a copper coin. Over this period of time, with all of the research he conducted, Less Moore became somewhat of a celebrity during the Great Depression. Less was known everywhere as an expert coin flipper.
All good things must come to an end Well, this went on for some time and he developed quite a following. But like anything that involves good old fashion math, in this case statistical probabilities, what more or less did Less in was the sheer number of coin flips he performed.
No matter how talented he was, or how smart he was…all the experience he had and all the research he did…and even during those runs when he could successfully guess the outcome of a coin flip 8, 12, 15 or even 20 times in a row, the odds of success for next coin flip were never greater than 50%. Each time there were only two possible outcomes. So it goes to reason that the more times he attempted to make that prediction and do it successfully, the more likely it would be that his outcomes would gravitate toward that 50% average.
You know, it’s ironic in Less’s situation that he would have been more successful if he would have simply tried to do this less often. And that’s something we can learn from when it comes to making investments.
Know your odds When you make an investment in the stock market for instance, your odds of success are no greater than Less had flipping coins. – because when you buy an investment, it means that somebody else has to sell it. Now you’re buying it because you think it is going to go up in value. They’re selling it because they think it is going to go down in value. And, just like in a coin flip, one of you is going to be incorrect every time.
Just like in Less’s situation, the more often you do something like this, the more likely it is over time that you will pick as many winners as you do losers. That’s why even someone who has a lot of experience and a lot of knowledge, and maybe a knack for picking winners can have an advantage in the short run. But anytime someone is playing a game whose best outcome is only a 50% chance of success, the more times they play it, the more likely it is that their results over time are just going to be average.
Lesson learned With the stock and bond markets jumping around as much as they have been lately and maybe increasing your temptation to trade more often, I hope you’ll remember the story of Less Moore. I think it can help keep you focused and I know it can help save you some money.