January 5, 2007 – Time for another format change in this blog. Every Friday will still remain the space for casual blog entries, but instead of J.S., from this date forward, every Friday, you’ll receive an entry from Kaeho’s Corner. Today, I’ll tell you how understanding the success of the top mixed martial artists in the world can vastly improve your performance as an investor. Before you brush this blog off, just take five minutes to read this entire article and you’ll fully understand what I mean.
As an avid martial artist for many years, it’s interesting to watch the evolution of martial arts competition to its current MMA (mixed martial arts) status in Japan, where MMA Pride events regularly attract crowds of 60,000+ and the MMA UFC events in the U.S. where UFC pay-per-view receipts now exceed those of world heavyweight championship boxing bouts.
Though the sport is called mixed martial arts, many of the current and previous champions seem to fight in one style only. If you have ever watched the bouts of Wanderlei Silva, Chuck Liddell, Matt Hughes, and Mirco CroCop, each of their successful bouts are carbon copies of their previous bouts. Some always win with devastating strikes delivered from an upright position while others, like Matt Hughes, have great success taking the fight to the ground and applying the “ground and pound” strategy. In reality, the fact that these fighters are not so multi-dimensional yet are still champions ironically in a sport called mixed martial arts has an important lesson to impart when it comes to investing.
The irony of MMA competition is that someone that is the master of one or two techniques will win a bout against a generalist that knows 20 techniques, but none of them particularly well. In essence, the more well-rounded mixed martial artist will lose most bouts to an artist that tends to focus his training in just a few techniques. Why? To become a master of certain techniques requires hundreds of thousands of repetitions and thousands of hours of training.
It is just not possible to master 10 completely different techniques brilliantly in even a span as long as ten years. In fact, many martial artists of legendary folklore status spent decades mastering just ONE technique which they would use to defeat opponents of all different styles. Miyamoto Musashi, widely heralded as the greatest swordsman ever, stated that he didn’t see the point of learning the many different sword techniques that existed, because after all, there are only a limited number of ways to deliver a fatal blow with a sword.
This very concept of keeping your strategies simple is one that large investment firms have mastered. For the last half of a century, investment houses all over the world have convinced tens of millions of people that diversification through Modern Portfolio Theory is the best, safest and only way to invest your money. This is rubbish.
What does diversification theory sound like in the context of this blog? Diversification theory is analogous to the mixed martial artist that knows 30 techniques but none of them with a decent level of mastery. When this martial artist enters a bout with another martial artist that has spent the last ten years, or even five years, mastering just 3 attacks, he will lose 99 times out of every 100.
If you have a financial consultant that applies the Modern Portfolio Theory of diversification to the management of your portfolio, think about how many asset classes he or she can speak of in terms of mastery. Then think about how many topics like energy, transportation, retail, etc. that he or she can speak of in very general terms. Who do you think will win the battle of portfolio returns between a financial advisor that is the master of very few asset classes and therefore can select stellar individual stocks in each of a few asset classes versus a financial advisor that is a generalist and will pick mediocre stocks in 10 different asset classes for you year after year after year. Again, the master of a few asset classes will win 99 years out of 100.
The Modern Portfolio Theory of diversification is the worst investment strategy I have ever come across yet the most widely applied all over the world. Someone that seeks the longtail of investment strategies will spend time each year determining what few asset classes to master for that year and then concentrate his or her portfolio in those few asset classes. Maybe in 2007, within the four or five asset classes of chosen mastery, three will be entirely different than the asset classes chosen in 2006. That too is fine, because when one only has to learn about 3 new asset classes in detail, this is very much an achievable goal. Becoming an expert in 10 to 15 different asset classes as required by the Modern Portfolio Theory of diversification is not.
For this very reason, I hate mutual funds. Mutual funds are the equivalent of the Modern Portfolio Theory of diversification to the nth degree. They are a tool by which managers’ lack of expertise lead to terrible returns and great returns are achieved by luck. I don’t care what all the literature out there tells you because 90% of it is sales literature with the end goal of convincing you to give your money to a particular product. I don’t think that you should ever own mutual funds, period. I know that sometimes financial consultants at large investment firms will tell you that you are best invested in mutual funds at levels less than $50,000 or $100,000.
The only reason this may be true is that due to the time constraints placed on the financial consultant by the firm and the pressure to gather assets, this is the best possible way for the financial consultant to manage your money. However, outside the constraints of a large investment firm, and without the time constraints placed on a financial consultant, you are far better off identifying individual stocks in a few asset classes of expertise to invest your money in.
Whenever I tell people this, the number one complaint I here is, well I’ve met with 10 different financial consultants and none of them fit the description of the one you say I need. Ever read Stephen Covey’s book, “The 7 Habits of Highly Effective People”? One of those themes is the notion of personal responsibility. You want something done right, then stop complaining that help doesn’t exist, because all the help you will ever need resides within your brain. Why do people work 60, even 70 hours a week to build a nest egg and then hand it over to someone else to manage with ineffective, foolish strategies like “diversify your way to mediocre returns every year” when all it would take is the equivalent time commitment of one university course for one semester to learn alternative investment strategies much more likely to set you on the path to financial freedom?
The fact that so few people seize personal accountability for their investment returns and are so adverse to learning something that is the most important course they could ever take in their lifetimes is not only inexplicable, it’s just plain foolish. So take control today, and if you have never been wholly satisfied with the returns from your portfolio, you’ll be amazed at what returns you’ll start to see within a year or two. I know that J.S. has spoken about blogging more about the longtail of investment strategies, so stay tuned this year to read more about this subject.
[tags]Wanderlei Silva, Chuck Liddell, Matt Hughes, Mirco CroCop, MMA, mixed martial arts, zen of investing, modern portfolio theory, investment strategies[/tags]
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.