Exploring the graveyard, learning machines, and hope

Welcome to the Intentional Dollar weekly newsletter — great work taking this small step to move your money forward. I’m Logan, a Certified Financial Planner™, and I’m excited you’re here!

What’s inside?

• One tool to experiment with

• Two quotes from others

• Three questions to dig deeper

• Four lines of poetry for the point

_{One tool to experiment with:}

The Graveyard:

How often have you bought a fund because it’s had great historical performance?

Solely looking at track record might seem like the right way to vet a fund, but it exposes you to survivorship bias.

Just because this five-star “hot fund” shows up on your radar, doesn’t indicate a fundamental strength of investment strategy, manager selection, or future prospects.

There’s a trite saying in the investment community that you’ve probably heard before. In fact, it’s a disclosure requirement (SEC Rule 156) when reporting historical returns: past performance is not indicative of future results.

You’ve likely dismissed this disclosure as noise. Noise that gets in the way of making money. So, you push ahead, buy the fund, and rest assured in the astute agents that steer the ship. This is called return chasing. It’s a pervasive investment strategy that many of us engage in. You can see this in the activity of the funds flows; higher past returns almost always leads to a massive influx of new dollars to a fund.

This is how we get to survivorship bias. The funds that hit our radar from a return perspective through their track record of strong returns, might be one of many funds the fund company or portfolio management group has started.

What’s this mean?

Let’s say company ABC starts five funds and runs them for three years. At the end of year three, four of the five have underperformed the market, and one has slightly outpaced the market. ABC will close down the four that haven’t done well and focus marketing dollars on the one that has.

There are graveyards filled with unsuccessful funds, and the problem is that we don’t see them. Our attention remains focused on the small sample of living funds, and that’s how we make our investment decisions.

In World War II, Abraham Wald looked at bullet holes in planes that returned from combat. Standard thinking was to reinforce the planes with armor in all the damaged areas. Wald threw out this notion and suggested reinforcing the areas of the planes that had not received damage from bullet holes. Wald’s theory showed that the bullet holes merely illustrated where the planes could take damage and safely return home.

Just because a fund is available with an attractive track record, does not mean it’s a success. Don’t use this analysis as the sole research point for your portfolio.

Take a look in the fund graveyard before jumping all in — why did previous funds from the same family fail, why is this one different?

Check out this short article on a thought experiment that illustrates how survivorship bias can be manipulated to induce action.

_{Two quotes on learning machines:}

We recently lost an investing legend. Charlie Munger’s sharp wit, timeless wisdom, and lifelong approach to learning leave a strong model for the rest of us follow.

_{Three questions on teaching:}

1. What would you teach/have you taught your children about money?

2. What anti-lessons could you share with them?

3. Would your actions support your words?

Which question stuck with you? Questions like these are spotlights for the mind. Reply to this email and let me know which one shined light on a previously dark cave.

_{Four lines of poetry for the point:}

Contact Me:

Content ideas, questions? Reply to this email or reach out to me at [email protected]