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Investing: A Zero Sum Game

Top 5 of the Week of March 27

Ben Carlson heads up our Top 5 this week with his annually updated performance chart for his blog, A Wealth of Common Sense.’s Larry Swedroe examines the drawbacks of momentum investing. And Peter Lazaroff in his self-named blog writes of simplifying the investing game.

Resolve Asset Management teaches us that we should be intentionally missing the best months—yes really. And CEO of Ritholtz Wealth Management, Barry Ritholtz, stresses the importance of a good investment process…

A Reminder to Us All

Ben Carlson, A Wealth of Common Sense

  • The yearly updates to this performance chart serve as a reminder to all investors that no individual year has any particular impact on the market in the grand scheme of things
  • Not only that, but it demonstrates how hard it is to foresee which asset classes will be winners and losers next year
  • The continued advice to diversify at least will help you balance those parts of your portfolio that you hate with those that perform well

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Momentum’s Drawbacks


  • Momentum is a factor which consistently generates good results in terms of equity returns and outperformance
  • But momentum is riskier when used in short strategies, as during market downturns you would short certain assets, only to get stung by the resulting momentum crash that occurs when the it rebounds
  • Since it is short-positioned momentum stocks which suffer this—weight your strategy properly, long-only momentum funds will survive in comparison

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Investing: A Zero Sum Game


  • The ‘zero sum investing game’ is a theory in which your gains are the equivalent to another investor’s losses: wherein the net change in wealth is zero
  • For the individual investor, the game becomes complicated by investment products with high fees, complex models, trading encouragement, and financial media
  • Keep things simple for yourself by avoiding trading, keeping costs low, diversifying your asset allocation in a thoughtful and rational manner, and sticking to a long-term investment horizon

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When to Be In and When to Be Out


  • Missing the best periods of the market is bad for your investments, while missing the worst is good—but this kind of market timing is very difficult
  • Compared to a buy-and-hold strategy where you’re actually better off if you missed both the best and worse times in the market—as those periods tend to cluster together
  • Back-testing shows if you can avoid both the best and the worst days you gain higher risk-adjusted returns—driven by lower volatilitys

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Think Your Process Through


  • Applying a static approach, for example just looking at P/E ratio, to something as complex as equity valuation massively oversimplifies the situation
  • Your investment process should always endeavor to undertake much more background examination than sometimes even financial managers consider, to truly be rational and advantageous for you
  • Until you consider greater depths of context within your process, then you’re working on mere guesswork—which can result in expensive mistakes

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Become a Better Investor Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.