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Investing Strategies: Looking Smart vs. Being Smart


Playing to win always better than playing not to lose.

In this morning's New York Times, I read with great interest about the success of the local teams' young, unheralded backup catchers. Their achievements led columnist George Vecsey to ask "why general managers have traditionally spent millions and millions on mediocre players past their prime rather than for eager and cheaper young players."

What does this have to do with Minyans?

A couple of things.

First, it gets to the heart of the thesis of my upcoming book, The Undoing of Cowardice. I argue that while it makes good, cheap theater to haul bank CEOs in front of Congress, it has surprisingly little to do with our real problems. Our markets are sick, I contend, because we've encouraged investment managers to behave like one another. We've encouraged supposedly independent thinkers to act like index funds. And index funds only work properly when independent thinkers are setting the prices.

In baseball's case, general managers would often rather spend the millions for so-called "known quantities" than be second-guessed by giving a job to an unproven rookie.

So "known quantities" -- better described in many cases as has-beens that never were -- get paid millions for lousy performance because their names are familiar.

Similarly, we encourage investment managers to buy "blue-chip" stocks because, as I always say, "You can never get fired for owning Intel (INTC)." Just think of all those years you could never get fired for owning General Motors (GM) or General Electric (GE).

Second, think about this from the players' perspective: As a major-leaguer with minor-league talent, you'll do everything within your power to stay in "the show." You'll be a good clubhouse presence, you'll buy nice birthday gifts for the general manager's kid, you'll say all the right things in the interviews. You just won't hit, run, field and throw very well. But you're still making millions when lots of minor leaguers making tens of thousands are probably better players.

Which teams win? Teams like last year's Tampa Bay Rays - young, talented, unknown and hungry. Which investors do best? The ones that invest to win.

Let's start exposing the playing-not-to-lose view of the world for the sick, Madoff-enabling mindset it is.
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No positions in stocks mentioned.

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