Snake Oil

1/29/2024

Snake oil was a thing. More specifically, “Stanley’s snake oil” was offered by the Rattlesnake King, Clark Stanley. I suspect Stanley’s customers knew the oil would not work but were sucked in by false hope, and the sales pitch.

Of course, the sophisticated people of the present day would not be taken in by snake oil – would they? How about knowledgeable and experienced investors being willing to give credibility to the latest predictions on the economy, markets, and stock price movements? Maybe this proposition is a bit more seductive than a mysterious substance hawked by a shady salesman. After all, the forecasters and stock pickers are usually very smart and work long hours for prestigious organizations. The existence of this ‘profession’ still begs the obvious question – if they can predict the future, why do they need to sell ‘advice’ rather than just making money directly?

The challenge of resisting forecasts about future financial performance is made harder because some forecasters are occasionally right. Perhaps my success in predicting this year’s Super Bowl teams will make me the go-to person to ask next year – but probably not. The forecasters also have other factors in their favor. People want to see motion. If we are not actively trading in and out of stocks, we feel we must be missing out. And there is always the tinge of regret when we realize we could have done better by acting a few months ago. 

Reviewing whether old forecasts work out confirms very quickly that few ever get it right, and none get it right all the time. Of course, some stock pickers working on funds can manage to straddle the performance of indexes over long periods of time. That is a reasonable outcome, but it seems a waste of time and high-quality brain power. Moreover, the firms that do the best generally do so because they stick to some basic rules – not because they have a window into the future.

What does this mean for the individual investor? We can put our investment health in the hands of the best and brightest purveyors of financial snake oil, or we can follow some simple disciplines.

Time horizon matters. In the long term, the movement of markets drowns out the pronunciations of the experts. In the short term, low-risk options seem best unless you want to gamble. Asset allocation has been shown to be a key determinant of long-term results. That means having, and sticking to, an investment strategy. Research shows that an excellent way to achieve suboptimal returns is by moving in and out of the markets based on short-term trends.

And finally, an area dear to our hearts – keep investment management fees low. Those fees are certain, and nibble away at returns.

Successful investors tend to be very patient and disciplined – and some live long lives, probably helped by the lack of day-to-day emotional upheaval. They do not watch the paint dry, but they recognize that they must give the paint time.

Richard Rushton