“I Am Not a Great Fool” – Investing Lessons from The Princess Bride

The Princess Bride can teach us a valuable lesson about investing.

I never imagined I would make such a statement until recently when I was pondering the futility of market participants trying to predict the next market downturn or pick the next big stock. 

For me it brings to mind the movie The Princess Bride.  One of my favorite scenes is the Battle of Wits between the characters Wesley and Vizzini.  For anyone who has not seen the movie the Battle of Wits is structured as follows: There are two wine glasses on the table.  One of which has been poisoned by Wesley.  Vizzini does not know which glass has been poisoned and must deduce which glass is deadly. Once Vizzini selects a glass they both must drink their wine and the loser will die.  Part of Vizzini’s thought process is as follows:

“Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I am not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the wine in front of me.”

Hyped Headlines

Just about three weeks ago the market was in another panic.  It was a situation very similar to August of last year.  Job numbers were concerning and the markets were reacting dramatically to every headline.  The same point we made then applies this time around.  These numbers are a distraction and will only reveal something in hindsight.  For example, the confidence level of the jobs report is between -50,000 and +150,000 jobs.  This means the true number of jobs gained or lost could be up to 150,000 different than what was reported.  That is a HUGE swing when it comes to monthly figures.  Monthly figures are very volatile and the only thing you can be sure to get from following these numbers is a stomach ulcer.

Market Pullback

Another well-written blog was recently posted by Dan Wheeler concerning the recent market pullback. Click Here.  The main idea of this great perspective can really be summed up in two points:

• Trying to time the market during these pullbacks is a futile exercise that almost always leads to more losses.
• A long-term investing focus with emphasis on diversification and low costs is clearly the best way to have a successful investment experience.

A third point may be a useful addition for the especially nervous investor:

• We cannot successfully time the market reversals, but we absolutely do try to predict them to happen.  One popular risk measure of the market, called volatility, is always a key input in determining a client’s portfolio and retirement projections.  If the market did not experience this volatility then that would be the real surprise.  The market swings can be disheartening if we have a short-term perspective, but some reassurance should come from thinking “I am glad my advisor already planned for this to happen.”