THE FINANCIAL PHILOSOPHER

Why Index Funds Had a Record Year

2012-01-26T09:56:30-05:00

"The little reed, bending to the force of the wind, soon stood upright again when the storm had passed over." ~ Aesop

Living on the coast of South Carolina, I can attest that a flexible nature is required to survive the most powerful tropical storms:

The hardest of woods break and the softest of reeds bend.

This go-with-the-flow nature extends to escaping deadly rip currents in the tide and it also applies to navigating the volatility of financial markets.

On my mutual funds site today, I wrote how Index Funds Had a Record Year in 2011. This milestone was marked by the record amount of investor money flowing (fund flows) into index funds. In contrast, one of the largest mutual fund families, American Funds, had record outflows. Why is this significant and what does it have to do with reeds in the wind?

"Thus what we gain is Something, yet it is by virtue of Nothing that this can be put to use." ~ Lau Tzu

Index funds are passively managed, which means there is no fund manager or team of managers trying to "beat the market" by using their knowledge and skill to research and analyze stocks with the greatest prospects of high relative returns. Instead, the objective is to simply match the returns of the benchmark index, such as the S&P 500 -- an example of knowledge yielding to humility. This passive nature keeps expenses low and eliminates the risk of human error caused by emotion (i.e. greed, complacency, and hubris) and it reduces the risk of inferior returns due to a random set of unforeseen circumstances (bad luck).

Actively-managed fund managers attempt to beat the market, which is the primary reason why most actively-managed funds lose to passively-managed funds over long periods of time. In summary, the higher expenses and greater exposure to human fallability is why S&P 500 Index Funds Beat the Pros in 2011...

Passive funds bend; active funds break.

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Thoughts on Taoism, Rip Currents and Market Cycles

Quotes on Contentment

Why Index Funds Beat Actively-Managed Funds

Defeating the 'Hobgoblin of Little Minds'

2012-01-19T13:19:11-05:00

"A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do." ~ Ralph Waldo Emerson

This quote from Emerson comes from his essay, "Self-Reliance," which in the essay's title itself reveals the wisdom within the famous quote: Foolish consistency in this context is a kind of mindless state (habit) that supports herd behavior and group-think; it is conformity, it is mindlessness, it is inauthentic, it is ultimately self-defeating, and it is normal. But normal is not healthy...

The self-reliant person is not necessarily someone who resists crowds or abhors outsourcing certain tasks to others--an island unto oneself, if you will--but rather a person who does not fall into sheepish behavior.

Here are a few general examples of 'foolish consistency' for context:

Continuing a certain behavior because "that's the way it's always been done."
Following the paved road of conventional wisdom for fear of following (and possibly failing in) your own path.
Choosing a career path that pays well with little or no consideration for how the career aligns with your personal priorities, passions and skills.
Failing to look at ideas from a different perspective because they don't match your pre-conceived (and possibly distorted) views of the world.

As author Richard Brodie says in his recent top-selling book, Virus of the Mind, "the hobgoblin of little minds" is "what keeps people from making the most of their lives." In different words, the hobgoblin is an absence of mind--an absence of self, an absence of consciousness.

"Not choice, but habit rules the unreflecting herd." ~ William Wordsworth

To defeat the 'hobgoblin of little minds' one must be aware of their tendency to fall into the lazy and mindless habit of conforming to conventional thought and behavior. For most people it is a matter of deconstructing and unlearning what you've learned.

This can be done by reflecting upon your daily activities and by discovering which ideas, thoughts and behaviors are not your own -- it is deprogramming and reprogramming your mind. Why do I continue to hold this losing stock? Why have I always voted for the same political party? Am I trying to please others and never pleasing myself? If I were born in a different country or to a different family or in a different time, would I think and feel the same about things? Is there more than one side of the truth -- more than one perspective?

How do you know? Now go and find out...

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Mind vs Brain Part III: Habits of the Reflective Mind

The Paradox of Habit Part III: Discovering the New Shore of Authenticity

The Shortcomings of Words

2012-01-12T10:51:39-05:00

"Occasionally in life there are those moments of unutterable fulfillment which cannot be completely explained by those symbols called words. Their meanings can only be articulated by the inaudible language of the heart." ~ Martin Luther King Jr.

Ironically, it is only words that can communicate their own inadequacy. Words, symbols and language are wonderful tools to communicate ideas but they also fail and mislead.

A few days ago, I started looking at quotes to share with my parents on their 50th wedding anniversary. It was an amazing coincidence that I randomly chose a file on my computer with dozens of quotes from various authors. My eyes went directly to today's featured Martin Luther King, Jr. quote. The coincidence is that MLK day is only a few days away and this particular quote summed up my own thoughts perfectly: What do you say to someone on such an amazing occasion? How does one sum up 18,250 days of dedication, trials, tribulations and joys? There are no words that are adequate; therefore we use words to express the failings of words.

In that spirit, here are few more of my favorite quotes on words, language and meaning:

"Words, he decided, were inadequate at best, impossible at worst. They meant too many things. Or they meant nothing at all." ~ Patricia A. McKillip

"Man acts as though he were the shaper and master of language, while in fact language remains the master of man." ~ Martin Heidegger

"Words, no matter whether they are vocalized and made into sounds or remain unspoken as thoughts, can cast an almost hypnotic spell upon you. You easily lose yourself in them, become hypnotized into implicitly believing that when you have attached a word to something, you know what it is." ~ Eckhart Tolle

"To the extent that language forces experiences into categories it is a screen between reality and the human being. In a word, we pay for its benefits… Therefore, while using language, as we must of necessity, we should be aware of its shortcomings." ~ Abraham Maslow

"The word is not the thing. I may describe a mountain most beautifully, paint it, make a poem, but the word, the description, the poem, is not the actual. We are generally carried away emotionally, irrationally by the description, by the word." ~ Jiddu Krishnamurti

"If I can assign names as well as pictures to objects, the right assignment of them we may call truth, and the wrong assignment of them falsehood." ~ Socrates

"The supreme paradox of all thought is the attempt to discover something that thought cannot think." ~ Soren Kierkegaard

Happy 50th Anniversary, Mom & Dad. Thanks to Martin Luther King, Jr for all that you've done for humanity. The greatness of the anniversary and of MLK are beyond words...