The average investor's return is significantly lower than market indices due primarily to market timing.
Interpretation
Most investors earn less than the market due to poor timing decisions.
In this quote, Daniel Kahneman highlights a common issue among average investors, which is their tendency to buy and sell assets at the wrong times, resulting in returns that fall short of the overall market performance. This underscores the importance of strategy and discipline in investing, as emotional reactions can lead to suboptimal financial decisions that affect long-term wealth accumulation.
In practice
During a finance workshop discussing optimal investing strategies.
We think, each of us, that we're much more rational than we are. And we think that we make our decisions because we have good reasons to make them. Even when it's the other way around. We believe in the reasons, because we've already made the decision.
Banks are run by executives, and executives protect themselves, and that does not always mean that banks are going to behave rationally.
Laziness is built deep into our nature.
Through some combination of culture and biology, our minds are intuitively receptive to religion.
You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general.
It's very easy for trusted companies to mislead naive customers, and life insurance companies are trusted.
This is not a game, ... Debt has become a part of who we are. It's become that spoiled child in the grocery store with their lip stuck out: 'I want it. I want it. I deserve it because I breathe air.' And, well, that's an uphill climb in our culture right now, to go against that and say, 'Hey, let's be grownups here. Let's be mature, learn to delay pleasure, save up and pay for things.'
Liquidity is a good proxy for relative net worth. You can't lie about cash, stocks, and bond values.
Observing that the market was FREQUENTLY efficient, EMT Adherents went on to conclude incorrectly that it was ALWAYS efficient. The difference between these propositions is night and day.
Investing is forgoing consumption now in order to have the ability to consume more at a later date.
If nobody can sell mortgage-backed securities based on trillions of dollars of unpayable instruments, there's a lot less risk in the overall system.
I am more and more impressed with the possibilities of history's repeating itself on many different counts. You don't get very far in Wall Street with the simple, convenient conclusion that a given level of prices is not too high.
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