On Being a Fool

Midas, you recall, was a dumbass. In return for taking great care of one of his drunks, Bacchus granted the Phrygian king a wish. Without thinking, King Midas asked that everything he touched turn to gold. This was nice until dinner time, when the food he put in his mouth turned to the yellow metal. Also the wine. In a panic, Midas begged Bacchus to reverse the wish, which Bacchus laughingly agreed to. So Midas was rich for less than a day.

Edith Hamilton said of him, He was an example of folly being as fatal as sin, for he meant no harm; he merely did not use any intelligence. His story suggests that he had none to use.

Well, sir, I know a lot about being a damn fool. Early in 1981 I noted that a medium sized mutual fund, The Chemical Fund, was up 38% the year before. I went to their headquarters in New York to find out what magic they were working in what had been a generally poor year for stocks. “We are, of course, very happy with our results,” was all they would say.

They tell us past results are no predictor of future performance, but who listens? I loaded up on Chemical Fund, only to find out later that the fund’s normal asset allocation included oil stocks, and 1980 was THE YEAR for owning oil stocks. Not for a decade afterward did Chemical Fund recover from the bear market in oil stocks that began the very instant I got into it.

The learning curve of most investors necessarily includes one or more incidences in which they go mad about what has happened lately in the market. We mean no harm, we just need to learn the hard way (always) that investments shine the brightest just before they tank.

The attitude required to succeed as an investor was best articulated by Carlos Helu Slim, the world’s second richest man. “Buying right is a discipline,” he said. “You must patiently wait for favorable circumstances. You will be buying when conditions are very bad and all the world is in a panic.”

This comes to mind after noting that Vanguard’s Small Cap Stocks fund is up, you guessed it, 38% year to date. I have no doubt that the fund is getting lots of money in from investors looking to replicate those results. It’s a shiny object, hard to resist, but we will remain in Vanguard’s money market fund until we see the blood running in the streets.

Midas was a slow learner. Ovid wrote about him serving as an umpire in a musical contest between Apollo and Pan. Midas, with his tin ear, chose Pan’s music over the more magnificent sounds Apollo made. Double stupidity on Midas’ part. He should have sided with the more powerful Apollo, who, appropriately, revised  Midas’ ears to look like the ears of an ass.

I will admit to having been an ass at times as an investor. I think that about half of my decisions turn out to be bad. But, you know what? All the good information is in the bad decisions.



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