Investment jujitsu

John Osbon - July 31, 2012

Investors can sometimes feel like they are facing market opponents that hold all the advantages, be it fantastically rich hedge funds, privileged insiders, rigged markets, or bewildering news events.  How can investors thrive in the face of such overwhelming odds stacked against them?  I suggest investment jujitsu – using your opponent’s strength to your benefit.  Here’s how to practice it.

Investing, martial arts style

The simplest jujitsu move is probably one you learned on the playground long ago. When that much bigger bully is racing toward you, about to bowl you over, quickly step aside at the last moment and give him a little shove on the back as you trip his ankle.  Suddenly he doesn’t look so big sprawled on the ground.

In the same way, some of the market titans that may intimidate individual investors are often felled by their own size, speed and power. Consider the following examples.

Giga-rich hedge funds:  Phil Falcone might have been a master of the universe when he was managing $26 billion in Harbinger Capital.  Now he is reputedly down to 4% of that, and is under indictment by SEC for misuse of company funds.  He’s not the only Icarus-like super rich hedgie to fall from grace.  Pequot Capital used to be one of the street’s biggest commission generators, until it went out of business suddenly in 2010, on SEC insider trading charges.  Those are only two in a long list of seemingly invincible investment firms that actually weren’t that at all.  Jujitsu move?  Just wait, watch, and walk on by.

Privileged insiders: Engaging in insider trading has to be one of the dumbest investment moves ever, but that doesn’t stop some high profile types from trying (anyone remember Ivan Boesky?).  The latest, biggest one is former billionaire Raj Rajaratnam of Galleon Management, who now gets free room and board for 11 years in federal housing after his insider trading conviction. How’s that saying go? The bigger they are…

The best and the brightest: How can an individual investor hope to compete against huge Wall Street icons that have hired the smartest MBA grads every year for the last 50 years? Consider Goldman Sachs. Goldman has more of everything – more money, more investment geniuses, more technology, more market influence, and an implicit government guarantee.

Individual investors could never beat Goldman. Well, unless they bought and held a lowly Dow Jones Industrials index. That’s right, the Dow outperformed Goldman stock over the period 1999 to 2012.

Total return

Annualized return

Goldman Sachs (GS)

57.9%

3.55%

Dow Jones (INDU)

65.2%

3.91%

 

No need to envy Goldman. Just ignoring it will do the trick.

I could go on, but I think you get the point.  Make investment jujitsu your immediate response anytime you feel threatened, behind, disadvantaged, or somehow missing out. Just step aside.  Let the titans charge past and fight it out among themselves while you stay focused on long term, low cost, tax efficient index investing.

 

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This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.

Nothing in this article is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice.

Any references to third-party data or opinions are listed for informational purposes only and have not been verified for accuracy by the Adviser. Adviser does not endorse the statements, services or performance of any third-party vendor without specifically assessing the suitability of a third-party to a client’s or a prospective client’s needs and objectives.

GS and INDU performance for the period May 31, 1999 to June 29, 2012. Source: Bloomberg.

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