Investing can be a complicated endeavor fraught with landmines. No wonder so many people don’t bother with it, instead selecting the bland default choice available in their 401-k account. However, there is a little known rule I call Murphy’s Corollary of investing that can help you achieve success over the long term.
Murphy’s Law states that “anything that can go wrong, will go wrong.” The associated Murphy’s Corollary of investing states that “no popular investment ever produces good long term performance.” Instead it is optimal to invest in securities and asset classes that are relatively unknown.
The reasoning behind Murphy’s Corollary of investing is very simple. People have herding tendencies. They become interested in whatever they hear their co-workers, friends and neighbors discussing. This holds true regardless of whether it is a movie, website or investment. So most people tend to pile into whatever investment is talked about the most at any point in time. In other words, the average investor chases “hot” investments.
In the late 1960s and early 1970s it was “one decision stocks” like Eastman Kodak, Mortgage Guaranty Insurance Company (MGIC), Xerox and Sears. These companies were called “one decision stocks” because you only had to make the – ostensibly intelligent – choice to buy them. Then you could just sit back and watch your brokerage account value ascend forever. And you never had to worry about selling – at least according to the “one decision stock” theory. These were your forever stocks.
Unfortunately for investors in these particular “one decision stocks”, Eastman Kodak entered bankruptcy in 2011. Its fellow one-time investment darling Sears is likely to do so shortly. MGIC had a near death experience during the Great Financial Crisis from which it still hasn’t recovered. At least Xerox, despite performing rather poorly over the last 50 years, hasn’t seriously flirted with liquidation yet.
In the late 1970s and early 1980s investing in gold and silver bullion was the rage. Everyone at the time knew the dollar was collapsing and precious metals were the only way to survive the coming financial apocalypse. I even saw an issue of Good Housekeeping magazine from the period with an article on gold bullion coins – presumably so that housewives could get in on the action!
But the Federal Reserve stabilized the dollar and the financial apocalypse was averted, or at least deferred for a few decades. Gold and silver then entered a 20 year bear market that brutalized any investor who had been foolish enough to jump on the bandwagon. Investors who bought because gold was fashionable dearly regretted it later.
Right now Tesla, Amazon and Facebook are some of the current investing flavors of the month. People say you can’t go wrong buying stock in these companies. It’s a bold new world and social media, clean energy, biotechnology and other “disruptive” technologies are where the action is. But I have little doubt that our current crop of must own investments will eventually meet the same disappointing fate as their predecessors.
The unifying theme among all these investments is that they were insanely popular during their time – even though they were separated by many decades. And it is important to note that their subsequent investment performance was universally bad. Murphy’s Corollary of investing states unequivocally that you should avoid trendy investments for just this reason.
Deferring to Murphy’s Corollary of investing has worked out rather well for me in the past. For example, in the early 2000s I became interested in investing in oil and gas royalty trusts. These passive corporations own royalty interests in oil and gas fields – hence the name. They receive royalty payments from these interests and pass them onto shareholders in the form of dividends.
I asked my co-workers and friends if they had ever heard of oil and gas royalty trusts before. I got either blank stares or strange looks. Nobody knew what they were. They also didn’t care. The price of oil was low at the time, meaning oil and gas investments weren’t popular, to put it generously. This helped convince me to buy the royalty trust I was considering. Within five years it was not only paying out generous dividends, but its stock price had almost tripled as well.
So you’ve never heard of royalty trusts before? That’s sort of the point. By the time your local mailman, auto mechanic or dentist is talking about an investment, it is almost certainly too late to make money in it. The best investments are, almost by definition, those nobody knows about.
That is one of the reasons why I love investing in art and antiques. It is almost impossible to run afoul of Murphy’s Corollary in the art and antique asset class right now. Everyone today is infatuated with stocks – and to a lesser extent, bonds. But no one is giving art and antiques the time of day. Murphy’s Corollary of investing is practically screaming at us to sit up and pay attention.
