My boys received a copy of the game Dominion as a Christmas present.
It’s a super game. You acquire cards with powers. The different powers work together in lots of interesting ways, but of course you must acquire them on a limited budget and have limited time in which to get as strong as you need to be.
Making good choices requires effective strategizing.
After playing the game two times, I wanted to learn more about how to play well. I typed the words “Dominion strategy” into the Google search box to see what I could find.
It pained me to see what turned up.
Dominion has only been around for a few years. And of course it is only a game. So it wouldn’t be a big deal if there were no good materials available. I quickly found lots of outstanding materials. In 30 minutes, I was a much improved Dominion player.
The painful part is in considering the contrast with stock investing.
Type the phrase “How to Invest in Stocks” into the Google search box and you are going to turn up lots of articles that recommend Buy-and-Hold Investing. My view (and I’m right!) is that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted ny the human mind.
How can it be that as a society we are intelligent enough to figure out scores of wonderful strategies for playing a card game but cannot summon up the mental energies needed to teach people even the basics of how stock investing works?
I have come up with eight explanations.
1. The Experts Are Compromised.
The people offering advice on Dominion are players who love the game. They have no incentive to steer people wrong.
Most of the people we think of as stock experts make more money if people buy stocks than if they sometimes go with other investment classes.
2. People Are Intimidated by Money Topics.
Middle-class people are smart when it comes to buying cars and sweaters and bananas.
We love a deal.
We trade tips with each other as to how to get the most value for our money.
When it comes to investing, though, we freeze. We think we are not smart enough, we turn to experts.
The truth is that most expert investing advice hurts more than it helps and we would all do a lot better if we just relied on our common sense.
3. The Game Takes Too Long.
It’s possible to finish a game of Dominion in 30 minutes. Newcomers to the game make dumb mistakes the first time they play.
They learn from those mistakes. They get better.
Investing is a game that extends over 60 years of your life (if you start at age 25 and die at age 85). By the time we figure the game out, it’s over.
4. The Feedback Loop Is Deceiving.
Each time you play a hand in Dominion, you gain insights as to what works.
Most of us don’t learn by reading books or by thinking things through using logic. We learn by responding to feedback.
Bull markets offer the most deceptive sort of feedback imaginable. It makes us feel good to see big numbers on our portfolio statements. No one lets us know that most of the gains experienced in bull markets are phony and are forsaken in coming years. We come to believe that we must be doing something right when the reality is we are being taken for fools.
5. Pointless Information Confuses Us.
The media doesn’t tell us what we need to do to finance our retirements effectively.
It pushes what sells. It’s the horse race stuff that sells. What’s up? What’s down?
That stuff is a distraction. We would be better investors if 90 percent of the information we take in on the subject didn’t exist.
The media doesn’t report on Dominion games. That helps people become better Dominion players.
6. There Are Too Many Dumb Players.
I mean no insult.
There is no law saying you must be smart about investing. The reality, though, is that people don’t play Dominion unless they care enough about the game to become skilled at it. We are all forced to invest, whether we feel any desire to learn about it or not.
The result is that the experts believe that they must not say anything that cannot be understood by people with close to zero interest in the subject. The most important findings from the academic research are rarely mentioned.
7. It’s Too Important for Us to Test New Ideas.
Yes, it’s a paradox.
But the reality is that the best way to become good at Dominion is to play it and try out different things until you catch on to some ideas that work well for you.
If investing didn’t matter so much, we could learn through experimentation. We are too scared of making mistakes to do that. We fasten on to one strategy and then tune out criticisms of it because they make us feel uncomfortable about choices that we know will have a big effect on our efforts to attain financial freedom.
8. The Most Important Lessons Are Counter-Intuitive.
Dominion was developed by one man. So it makes sense. The guy who developed the game made sure of that.
The stock market makes sense too, once you factor in the crazy twists and turns imposed on it by the emotional humans.
But the most important truths of stock investing are counter-intutive. The stock market often acts in ways contrary to our expectations because it is not controlled — it is the product of millions of human interactions.
In Summary
We care too much about investing.
That’s the root problem.
When you care too much, you can’t bear to acknowledge mistakes. That means that you can never advance in knowledge.
Perhaps it would help if we tried to think of investing as just another game in which strategy matters rather than as a matter of life and death. Perhaps by coming to care a little less we could come to learn a whole big bunch lot more.
Rob Bennett argues that the true cause of the current financial crisis was the heavy promotion of Buy-and-Hold investing strategies. His bio is here.
Ken Faulkenberry says
Rob – It amazes me how many different and entertaining ways you can come up with to make the all important point that valuation matters! Thanks for another interesting post.
Rob Bennett says
Thanks, Ken.
I have come to believe that valuations and how investors react to them is the pretty much the entire story of stock investing. If you get valuations right, you can get everything else wrong and still do very well. If you get valuations wrong, you can get everything else right and still fail horribly.
The amazing thing is how rarely others talk about valuations in an in-depth and serious way. Just about everyone agrees that valuations matter. But how many go to the trouble to quantify the effect? In 2000, stocks were temporarily priced at three times their real value. That means that someone with a portfolio nominally valued at $300,000 in truth possessed a portfolio with a lasting value of $100,000. How many of the investors of the time took this critically important reality into account in their financial planning?
We are afraid to look at the valuations issue too closely. It tells us too much about ourselves to do so. A people that misvalues stocks is a people that is fooling itself about a very important matter and making effective financial planning impossible by doing so.
I don’t like to plant dark thoughts in people’s minds. So I feel a need to end this comment with some positive spin. Say that it is so that we have messed up terribly by paying insufficient attention to valuations. Is that good news or bad news?
It is wonderful, wonderful news! It means that we have available to us today a means of learning more about how stock investing works in a short amount of time than we have ever learned before. All we need to do is to take a serious look at The Forbidden Subject and we will all be able to obtain far larger returns than we ever imagined possible while taking on dramatically less risk.
I’ve been to the other side of the Big Black Mountain. There is some amazing stuff to be found there. I encourage all reading these words to find some time in their schedules to explore the future of stock investing — Valuation-Informed Indexing. It’s a far better and far less risky way to invest in stocks.
Not everyone agrees with me, to be sure. But that is my sincere belief.
Rob
Steve says
I always try to execute the village smithy combo…Works every time
Rob Bennett says
There you go!
I go through the deck of 25 cards and rearrange them in the new order of my favorites just about once a day. Here are the current top five: (1) Festival; (2) Chapel; (3) Laboratory; (4) Smithy; and (5) Cellar. Village is not too much farther down the list. (I know that Witch is a powerful card but I don’t have the heart to use it against my friends.)
Thanks for bringing a nice measure of cheer to my Thursday morning, Steve. Now I’m feeling a temptation to tell my boys to hold off on school and squeeze in a quick game with their dad!
Rob
Dan Thompson says
I loved the article, two of my favorite topics rolled into one article. I credit a lot of my own intelligence to games such as dominion, settlers of catan, magic the gathering and various video games which require strategy development. Currently dominion is my favorite, with alchemist as my favorite card (I love most cycle strategies). If your kids get deep into it I highly recommend the additional packs, they add entire new elements to the game.
I think you nailed the pitfalls, there is far TOO much information out there and as you mentioned a lot of isn’t very good information. I’m currently working with my father, who has made a career in the stock market (only investing his own cash) and now lives a retired lifestyle most can only dream of, to bring his SIMPLE yet effective investment strategy to the masses.
Great post,
Dan
Rob Bennett says
I highly recommend the additional packs, they add entire new elements to the game.
Thanks much for your kind words, Dan.
My boy Robert’s birthday is in March. My wife and I are getting him the “Seaside” expansion and his aunt is getting him the “Cornucopia” expansion. Somewhere down the line I’m sure we’ll also get “Prosperity” and possibly “Intrigue.”
Rob
Some Watcher says
And yet they will still turn 21 without having ever been to Disney.
Rob Bennett says
The comment by “Some Watcher” has an exceedingly odd background. I’ll explain for those who would otherwise be left wondering what it is about.
I am the person who discovered the errors in the Old School safe withdrawal rate studies (financial planners use these studies to help their clients plan retirements). I wrote about the errors in a May 13, 2002, post to a Motley Fool discussion board on early retirement.
Hundreds of community members were excited about our discovery and wanted to explore its implications. But there was another group that was hotly opposed to this. The latter group employed abusive posting to bring down the board. My findings have been confirmed by numerous big-name experts in the years since.
That long-age discovery has led me and hundreds of my fellow community members to all sorts of exciting places. The reason why the Old School studies got the numbers wrong is that they failed to take into consideration the effect of valuations on long-term returns. I did a lot of research in an effort to learn how it was that this mistake was made.
It turns out that Buy-and-Hold was developed at a time (the early 1970s) when there was an academic theory that valuations do not matter. This theory was discredited in research published by Yale Economics Professor Robert Shiller in 1981.
But the Buy-and-Holders elected for a variety of reasons not to change their strategy to conform to the new research. Buy-and-Hold became popular anyway because of the huge bull market. But all of the research done by Buy-and-Holders over the past 30 years is analytically invalid because of its failure to take valuations into consideration.
So we have a big mess on our hands today!
Things are starting to change for the better since the stock crash. People are now beginning to ask the questions that they should have been asking all along about why Buy-and-Hold advocates claim to be supporting a strategy rooted in the academic research but in fact are putting forward ideas discredited by the last 30 years of research.
I call the strategy that we have put together over the past 10 years “Valuation-Informed Indexing.” It is Buy-and-Hold corrected for the mistakes that were made before all the research was completed. The data shows that switching to this corrected approach to Buy-and-Hold would permit most middle-class people to retire five to ten years sooner than was possible during the Buy-and-Hold years. Returns are much higher with Valuation-Informed Indexing, but risk is greatly diminished. Most of the work I do today is aimed at getting the word out re the new and better and safer strategy.
There’s a group of Buy-and-Holders that meets at this site:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?board=HOCO
The site is owned by the authors of one of the discredited Old School SWR studies. This group discusses strategies to use to intimidate people who come out in support of Valuation-Informed Indexing. For example, they recently went after an associate professor who has done some wonderful research helping us all to understand better how stock investing really works. They threatened to get the guy fired from his job if he continued to do research in this area. He announced at his blog a short while later that he would no longer be doing research in this area. This is truly ugly stuff.
This group follows me around to all the sites at which I post Guest Blogs and puts up posts aimed at intimidating me and any community members who show an interest in learning about Valuation-Informed Indexing. The idea of the comment left by “Some Watcher” is that, because this group has been able to do great harm to my internet business, I will not have enough money to take my kids to Disney World. Some funny joke, huh?
I tell this story because people need to understand that we are in a transition period re our understanding of how stock investing works. The Buy-and-Holders made very important contributions. They didn’t get it all right. No one ever does. Valuation-Informed Indexing is a huge advance (I certainly do not claim all the credit for development of the new strategy — hundreds of people have helped, including many big-name experts). It is the unwillingness of the Buy-and-Holders to acknowledge their mistakes that caused middle-class people to lose so much of their savings in recent years. As we move to the new approach, our economy will recover and in fact we can expect to see times of great economic growth as people learn how to grow their money through effective stock investing.
The ugly stuff will get blown away in the wind. The breakthrough insights will be helping millions of people live fuller and richer lives for many years to come. The biggest hurdle today is that we all need to adopt an attitude of trying to help the Buy-and-Holders understand why they need to let it go and permit us all to move on to a better place. Progress can be delayed, but it cannot be stopped. The Buy-and-Holders are hurting themselves as well as all the rest of us with this behavior. We need to be true friends to them and coax them into behaving more responsibly and correcting the things they got wrong before their well-documented mistakes cause more human misery.
I’ve been working this field for 10 years now. It gets discouraging at times to see all the good that we have achieved in an intellectual sense that has not helped nearly enough people in the real world because we have not been able to spread the word. But I can tell you that those trying to turn back the clock are weaker now than they have ever been before. More and more people are catching on that the story we have been told by Wall Street about stock investing just does not add up. I believe that the Personal Finance Blogosphere is going to play a big role in bringing this economic crisis to an end and in taking us all to a much better place.
And when we get there —
I’m going to Disney World!
Rob