January 21, 2007 – Defined within the realm of the statistical Bell Curve, the long tail would reside in the skinny tail at the borders. The long tail, in regards to goods and services, refers to the evolution away from mainstream offerings towards more niche products and services. With the internet drastically reducing the costs of establishing distribution channels, the ability of entrepreneurs to focus more on the long tail sector to fit their customized needs is gaining increasing appeal.
However, almost no one speaks of the long tail of investing. The long tail of investment strategies are the strategies that do not heavily rely on fundamental or technical analysis, but exploit other strongly predictive factors to produce not only superior returns to traditional investment strategies but also investment opportunities with far better risk-reward paradigms than those produced by traditional investment strategies. Here are 10 reasons why the long tail of investing is the only way to build wealth.
(1)You will never achieve the level of wealth you desire by handing your money over to a large investment firm. The vast majority of private investors hand their money to large institutions and allow them to invest their money for them. If this were truly the best way to achieve financial freedom, then almost every one you know would be ecstatic with their financial consultant.
Think of how many people you know that absolutely rave about their financial consultant. The fact that 90% of people you know do not rave about their financial consultant should tell you that niche investment strategies, or longtail investment strategies, are far superior. The ones that are happy with the large investment houses already were independently wealthy before they sought out their help. Think about how many people you know that have ever told you, “I wasn’t wealthy before, but thanks to my investment firm, I am wealthy beyond my dreams now.”
(2) Thanks to evolving information technology, there are many other means of making investment decisions than just utilizing fundamental and technical analysis. Though people have been really slow to grasp this, once they do, long tail investment strategies, like those invented by maalamalama, will boom. There is no doubt that the level of top-notch financial, political and corporate information available to the average investor has increased by leaps and bounds within the past decade.
There is a virtual treasure map that was created by the flattening of the world over the past decade to selecting stocks that are poised to explode. However, because the largest, most powerful investment institutions in the world have kept the masses of investors fixated on traditional investment techniques such as value and fundamental analysis, the long tail of investment strategies is currently much further behind in its developmental phases than it should be.
The best analogy I can use when explaining why people have ignored the longtail of investing is to analyze the adoption of the United States of Internet Protocol Version 6 (Ipv6). When China started preparing its country for Ipv6 a decade ago, the benefits in increased security and its added value properties in e-commerce were evident even back then.
However, people in the U.S. were comfortable with the lesser Ipv4 so did not take any action until China, Korea, Taiwan, and Hong Kong embarrassed the U.S. to move forward and catch up with Asia. I see the same thing happening in the educational realm of investing. Everyone is comfortable with the traditional investment strategies that have been propagated for the last several decades so nobody sees a need to move forward even though much better strategies exist today.
Just as people have finally realized how superior IPv6 is to IPv4, the world will eventually realize that the safest and best means of investing money reside in the long tail, and they will eventually adopt strategies that reside in the long tail of investing.
With so much investor skepticism of corporate integrity sparked by past accounting scandals at Enron, WorldCom, General Motors and the like, and the current, ongoing backdating option scandals, investors will increasingly seek alternate means of making investment decisions other than crunching numbers that they feel are untrustworthy.
Furthermore, technical anlaysis often yields false positives as well. A chart will show indexes that appear bullish having just broken through a ceiling of resistance only to have the index turn back downward for a prolonged period of time, or a chart will appear bearish having just broken through a floor of resistance only to turn around and begin anothe bullish ascent. In fact, you have seen some of these turnaround trends with some of the technical posts that I’ve placed on my blog in previous months. In fact, that is why I always state that I never rely solely on technical indicators to make my decisions.
I rely only on technical indicators to confirm or dispell what my long tail investment strategies tell me. Of the three types of analysis, fundamental, technical and longtail, long tail investment strategies yielded by far the least amount of false negatives and false positives. That’s why I rely on them so heavily. To see the superiority of long tail analysis, just read my recent blogs about utilizing long tail analysis to call the price direction of the U.S. dollar and gold in 2006.
This sentiment will lead to an evolution of long tail investment strategies, and the discovery of more efficient and better predictive means of making investment decisions than even those that already exist. Even current longtail investment strategies, such as those utilized at maalamalama are constantly evolving as access to reliable information increases every year. Making decisions as if you were a fly on the wall of boardrooms is no longer a fantasy. It is possible, thanks to the evolution of the information landscape.
(4) With the growth of blogs and pure information sites on the web, the stranglehold of global investment myths, including the Modern Portfolio Theory of diversification, will soon be exposed for what they are — cleverly disguised sales strategies posing as investment strategies. Once people realize this, long tail investment strategies will gain wider acceptance, much like acupuncture and herbal medicine eventually gained credibility as healing regimens in the schools of Western medicine.
(5) Wider acceptance of alternative, long tail investment strategies that far outperform those utilized by global investment firms will happen as word of successes via these strategies spread throughout the world via the internet. The internet distribution channel can and will be used to change the mindset of investors.
(6) The Do-It-Yourselfers are Growing — With the success of books such as Stephen Covey’s “The Eight Habit” that emphasize personal accountability to achieve excellence versus handing control over to someone else, cultural shifts will happen whereby people will seek to seize control over their own financial future versus just handing their money to a firm to manage. As this cultural shift happens, multitudes of people will realize that they are shorting their returns significantly every single year by handing their money to global investment houses.
(7) The flattening of the world and accessibility to previously inaccessible investment information will undoubtedly yield an increasing amount of investment strategies that reside in the long tail. People will realize the foolishness of believing in the one investment strategy thrust upon them by global investment houses for the past half of century as “the only viable and safe way to invest.” If the younger generation takes an interest in investing, adding their creativity to the investment arena will result in explosive growth in the long tail of investment strategies. However, since the odds of this occurrence are quite low, a more gradual shift towards niche investment strategies is much more likely.
(8) The explosion of social networking sites like YouTube, MySpace, Friendster, and so forth, will amplify the viral marketing of long tail investment concepts. Again, ignorance of long tail investment strategies causes fear and hesitancy to use them. Viral marketing of long tail investment concepts will increase millions of investors’ comfort level with these different and unique concepts.
(9) People are ultimately interested in returns, no matter how much global investment firms try to separate themselves from their competitors with smoke and mirror service claims. All the gratitude for luxury box suites at Los Angeles Lakers games, suites at the Four Seasons Hotel, conferences at world-class golf courses and resorts will quickly wither once people realize how much more money they are earning with long tail investment strategies.
(10) Again, because people will readily abandon all the perks they get as a preferred client at a large investment firm for far superior returns on their portfolios, the long tail of investing will eventually reach a critical mass. Eventually the long tail of investing will migrate towards the center and become the mainstream methods of investing, though this may take several decades to occur.
Here’s another article that offers a slightly different perspective on the long tail of investing that you might find interesting from Mark Cuban, the outspoken billionaire owner of the NBA franchise Dallas Mavericks.
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.