The Holy Grail of Investing

The Holy Grail of Investing

Sometimes the allure of the myth overwhelms the reality.

The reality is that good investing is hard. 

The Holy Grail of investing is a system that can be employed to consistently beat the market.  Countless investors have destroyed fortunes in search of this Holy Grail.

Factor-based investing, trend-following, technical analysis, channel trading…. There have been hundreds of books and articles describing “fool-proof” systems to beat the market.

When I read about one of these strategies, I’m reminded of the movie Indiana Jones and the Last Crusade.  In this movie, Indiana Jones, accompanied by his father, goes in search of the actual Holy Grail.  They must decipher coded maps, overcome numerous obstacles (not least of all is half the Nazi army), and finally pass a series of tests. 

At long last, they have it in their possession – the Holy Grail – the divine cup which has the power to heal and grant eternal life.  However, once they try to remove it from its home in the temple, it jumps out there grasp and rolls down into a fissure that opens in the floor of the temple.  Indiana’s female companion on this quest, Elsa, dives into the opening to save the cup, which has landed on a small ledge.  Mr. Jones grabs her hand before she falls into the cliff, but she reaches out with her other hand for the Grail.

“I can almost reach it!” she says straining

“Elsa!  I can’t hold you!  Give me your other hand!”

“I’ve almost got it…” her fingers brush the cup as she is clearly not paying attention to Dr. Jones’s warning.  The ultimate prize is so close.  Then her hand slips out his grasp and she disappears into the void.

Indiana then is faced with the same dilemma as he almost falls into the hole.  His father grabs his hand, but he sees the Holy Grail so close.  He reaches out for the cup with the same single minded focus of Elsa, until his father snaps him out of it with a firm “Indiana.  Let it go.”  (It only now occurred to me how funny it is that Elsa was unable to “Let it go”)

Why Do People Go for the Grail?

While Temple of Doom is still my favorite in the series, Last Crusade is a great movie, and I always loved that Grail scene.  It is incredibly illustrative of the power of greed in human nature.  Even when we know the risks, sometimes we just can’t escape the draw of money or power or fame.

In the investing world, we see it far too often.

Man on the street: “My brother-in-law told me that I could use a trend-following strategy and retire by the age of 45.  He says it will beat the stock market but only have the volatility of bonds.”

Me: “That sounds too good to be true.”

“But what if it works?”

“I think you should probably pass on this one.  Let it go.”

“What if….”

At that point the person has lost interest in the conversation and only thinks about life with this windfall they are about to receive.  Talk about risk or being rational gets drowned out by their daydream of themselves enjoying a margarita on a beach somewhere.  They are dangling over the pit, and the grail is in their reach.  The only person who will make money in the deal, however, is the one who sold them this fantasy.

Think about it.  Why do you buy a lottery ticket when you know you have a 99.999% chance of losing?  You do it for that “what if?” feeling.  You get to spend a day or two thinking about all the things you would buy, the people you would help, the smart investments you would make.  You are actually paying money for the chance to dream.  That dream of riches, or of eternal life, is a very strong draw.

Why Systems Don’t Work

The iron-clad rule of investing is that in order to earn additional return, you need to assume greater risk.  The Man on the Street begs to differ:

“But I read about ( insert name of famous investor here ) and how he uses a system which returned ( large amount over the market ).  So obviously it can work.”

To which I reply, as politely as possible, that just because someone has seen good returns using some investment process, does not mean that it:

1)      Will continue to provide good returns in the future

2)      Is repeatable by other investors

Anytime there is a flaw in the market, which could be exposed by a model, capital comes rushing in to take advantage.  Soon the increase of money into that particular investment will boost the cost taking away any advantage gained by the early adopters.

So, while a great investor may tout a system they use to beat the market, or earn outsize returns, the truly great investors:

1)      Have a disciplined process to which they adhere

2)      Work continuously to evaluate and evolve their model, their thinking, and their process in order to adapt to changing conditions

3)      Often have some level of luck

For instance, Renaissance Technologies is one of the most successful hedge funds of the last 20 years.  It runs a purely computer driven, algorithmic trading system.  The company, however, does not just turn on the computer in the morning and call it a day.  It continues to hire PhD’s, mathematicians, computer programmers, to update and refine the algorithms.  It’s a continuous process of evaluation and improvement.


While it’s tempting to buy into the Siren Song of an investment system which can’t be beat, try to remember the lesson of Indiana Jones and the Last Crusade – If the Holy Grail does exist, it is extremely difficult to find, and it cannot be taken from the temple.  If you stumble upon a process that seems to fit all the parameters of a Holy Grail, tread very carefully.  Trends in market prices are only trends until they aren’t anymore.  Prices that tend to run in channels, do so until they don’t anymore.  The best traders and smartest people in the world have blown up thinking they found the next big thing.

Long-Term Capital Management was a hedge fund run by Nobel prize winning economists who derived the formula for pricing derivative securities.  The fund would analyze and value derivatives and take advantage of discrepancies in prices, using leverage to amplify their returns.  The system they used worked great for a couple years and the fund attracted lots of investors and made lots of money – that is, until the Asian Currency Crisis completely wiped the fund out within 4 months.  Even the smartest guys in the room can fall into oblivion in reaching for the Holy Grail.

So stick with reality, and practice prudence, due diligence, and diversification.  It may not be as exciting as an “unbeatable investment system” but your odds of falling into pit of money-losing doom, will be much lower.

Until next time….

“When models turn on, brains turn off.” Til Schuermann