Zen & The Art Of Index Investing

September 18, 2009

After three decades on Wall Street, adviser Kent Grealish has found peace of mind by learning where mysticism ends and investing begins.

I began my professional investment career 32 years ago as a novice in the Church of Market Timing.

At the time, services were being held in the classroom of Dean Witter (now Morgan Stanley). That is where I was baptized into The Faith – the belief that we could forecast stock prices and “beat the market.”

Kent GrealishA period of enlightenment followed. I learned the ancient mysteries of the price-earnings ratio, point-and-figure charts and going short against the box. I became quite proficient in the rite of the Bunker Ramo Quote Machine, and practiced the ceremony of prostration before the high priests of compliance.

I worshipped performance. Accordingly, I became a true believer.

After serving my time in purgatory, I was sent out with my brothers to carry out missionary work, spreading the faith to the heathen.

This being 1974, I quickly found that the bull market paradise of the 1960s had been transformed into the bear market hell of the 1970s.

The ranks of the unbelievers swelled with thousands of apostates who had once believed, but now rejected, the faith. Some even believed that we were witnessing the apocalypse, the end of the New York Stock Exchange.

Quest For The Holy Grail

It was very challenging work – particularly preaching by cold call.

But we believed and persisted. We read the holy books of Benjamin Graham and Gerald Loeb. We sat at the feet of Granville, Prechter and Garzarelli; we marveled when they prophesied a major turn in the market (even if it was only once and never again).

We were guided and succored by the Great Evangelizer Ruykeyser and his minions in the media. The market shone down upon us, showering dividends and stock splits like manna from heaven.

But I began to notice inconsistencies and errors in the tenets of The Faith. As doubt began to creep into my soul, I became a fanatic. My efforts were redoubled, sheltered in dogma and rejecting the siren song of the Indexers and the Antichrist Bogle.

I studied the esoteric secrets of the “B School” and was inducted into the College of MBAs. But I found no solace, no peace of mind, no answer to my supplications.

Little by little, reality intruded into my world.

There was the October 1987 Crash: judgment day for the Portfolio Insurers. There was the mystical power of the Beanie Babies and the destruction of Long Term Capital Management, which pulled down the elders of the Prize of Nobel. ("How the Mighty have Fallen!")

But it was the miracle of the dot-coms that shattered my faith forever.

It began with the heresy of "This Time It’s Different." Then there was the levitation of the stocks of money-losing companies. I witnessed the adoration of the IPO and the blind faith of the innocent day trader.

It was all too much. I couldn’t fight any longer. I surrendered and renounced my faith.

Zen & Indexing

So, now what? I knew that I would never find certainty elsewhere. I, then, understood that there was no perfect strategy; all investment plans have flaws and limitations. And I realized that my search for the perfect strategy had been, like the Quest for the Holy Grail, a noble mission doomed to failure.

Then I found Zen and converted. I accepted the market and the world as mysterious, unpredictable, and chaotic.

I discovered that if you fight the water you will drown, but if you relax and accept the water you can float.

I stopped fighting (the Tape). Forsaking trading, I embraced a passive investment strategy. I bought index funds and truly became “one with the market.”

I was saved.

It is said: "Blessed are the Indexers for they shall find peace of mind." For it is by accepting indexing that we can outperform most mutual funds. It is asset allocation and diversification that will safeguard us from the Great Bear.

And it is by rejecting the Heresy of Market Timing that we can find serenity and still earn a good rate of return on our investments. Amen.

Kent Grealish is a partner at Quacera Capital Management, a fee-only advisory firm. He welcomes comments and suggestions for future columns at: [email protected].



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