“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.”

Vizzini finds himself trapped in an anguishing mental “loop” that leads to an impossible decision.  This just happens to be the exact same scenario a market timer or stock picker finds himself in.  Let me explain by example. 

Suppose I have a crystal ball and tell you the exact date the market will bottom out and begin a historical rise.  Let’s say it’s August 12^th.  So all you have to do is enter the market just before that on August 11^th right?  Well, not exactly.  We have to assume, just like the real market, that many other investors also have this information.  So if everyone plans to buy on the 11^th, then actually the day to buy will be the 10^th so as to beat everyone else to the punch.  But wait! If we know that those other people are clever and they know we will buy on the 10^th, then they will try to buy on the 9^th.  Therefore; we must buy on the 8^th.  But Wait…..

There are an infinite number of scenarios where this logic applies whether it be the time to enter the market, the time to buy a stock, the time to sell a stock, etc., etc.

The point of the illustration and the scene from The Princess Bride is this:  If you want to earn a rate of return from investing in many industries and businesses then you need to develop a broadly diversified global portfolio.  If you would rather engage in market timing and stock picking then know that no ratio, or rating, or analysis matters at all.  All that matters is what your opponent thinks about that same analysis.  And all empirical research shows that even the brightest minds in the world cannot win the game often enough to earn more than the market rate of return.  They actually earn LESS.

In other words, if you decide to time the market you are engaging in a battle of wits.  The problem is the same that Vizzini faced,  it does not really matter what your choice is because the game is rigged and both glasses of wine were poisoned all along…..