What Do You Really Know?

ARROYO GRANDE, Calif. – The best investing advice is simple, timeless, paradoxical — and often ignored. Yes, ignored, because so many investors cannot make decisions. Lacking self-confidence, they rely on the random flow of breaking news.

That overwhelming rush of new information, all of it short-term, drowns out the investment advice to which we should be adhering. Those timeless principles demand that we ignore breaking news and take personal responsibility, a very scary idea for investors who have lost their self-confidence.

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This message has been summarized by the Chinese master Lao Tzu: "Those who know do not speak, those who speak do not know." He offered this investment advice three thousand years ago in the Tao Te Ching. Test it on any guru: Gross, Siegel, Bogle, Cramer, Bernanke, Paulson, and yes, even me. Of course, if investors took Lao Tzu's advice, Wall Street would be out of business. You'd be in command!

Those who speak do not know

Former Fed Chairman Alan Greenspan was a modern Taoist guru, once upstaging Lao Tzu: "If I seem unusually clear to you, you must have misunderstood what I said."

Similarly, at the peak of the dot-com mania, a BusinessWeek headline read: "What do you call an economist with a prediction? Wrong." Why? Like investors, economists also feel secure hiding behind a consensus based on the past. Another example: Remember a few years ago when a famous university economist, a former member of the Council of Economic Advisors, miscalculated federal tax projections by a humongous $12 trillion?

And a few years ago an InvestmentNews study concluded that "if you bought virtually any fund recommended by the various 'best of' lists published" the prior year, you would likely have lost money, and "in many cases would have underperformed the market." Yes, those who do speak often do not know.

And those who do know ... don't speak

Wall Street and the fund industry have a code of secrecy rivaling the mafia's. Their code gives insiders an "informational edge" over clients. They always get more information, better, sooner than Main Street investors — and selectively repackage it before passing it on to their clients. Investors are at a disadvantage; the playing field's not level, the game is fixed, the house always wins.

Their code is well protected by politicians and a vast network of nondisclosure laws that give Wall Street's insiders power to withhold vast amounts of information from their clients. Yes, they know, but won't speak; their greed makes them "wise."

What to do with your double-bind

OK, suppose you've finally decided to take Lao Tzu's advice. You're not going to pay attention to anything I (or anyone else) says. After all, according to Lao Tzu if I really did have the best advice, I wouldn't tell you, unless I wanted to mislead you, right? And if I did speak, that'd be proof I really didn't know what I was talking about. And this column would have never been written. (Yikes, I'm beginning to sound as obscure as Alan Greenspan!)

Unfortunately, if you do take Lao Tzu advice, you'll be trapped in an even bigger double-bind! You can't trust pundits. But how will you know if you know "enough" to trust yourself?

I discussed this cryptic area of do-it-yourself investing metaphysics with financial adviser Paul Merriman, and I came away with the sense that investors may know too little to make any decisions:

1. Stuff you know, that actually is true

We'd all love to have tomorrow's newspaper. Unfortunately, investors are historians not futurists. We're overloaded. Even with the best data available, like our fund profiles, you're dealing with 10,000 funds, each with 100 bits of data that's actually old news, usually at least 3-6 months old. So you oscillate between a false sense of being well-informed, and insecurity about the truth.

2. Stuff you think you know, but is wrong

Economists, securities analysts and cable's talking heads know our brains prefer positive upbeat news. Eternal optimists, they speak the good news. You know you don't know the future, so you turn to the media and press for hints, thinking maybe if you just listen to CNBC long enough, or read one more newspaper, or research one more fund, you'll figure out tomorrow. The blind are leading the blind. Your mind is rationalizing a bad idea.

3. Stuff you know you don't know, but obsess about

You know you don't really know much about tomorrow. You know "past performance can't predict future results," although you tune it out. Every day the media talks endlessly with hundreds of market gurus, economists, CEOs. You get all the contradictions, oxymorons, dilemmas, paradoxes, a daily torrent of conflicting data about tomorrow's unknowns and unpredictables. So you obsess anxiously, trying to figure out what you can never really know until after the fact.

4. Stuff you know to be true, but deny

Our minds are masters at denying the truth, even when it's staring us in the face. In hindsight any damn fool could have predicted the dot-com collapse. But greed drove us and we denied P/E ratios mattered. We deceived ourselves with clichés: "This time it's different, a new economy." You can't trust optimism or pessimism, not yours, not theirs. You're fortunate if 25% of what you know is true. But the fact is, even when you feel you're right, you might still be dead wrong, unable to let go of even a bad idea.

5. All the stuff you don't know that you don't know

Stuff you don't see until after the fact, when it's too late! Unknowns that unpredictably crash markets: Natural disasters, deficit collapses, homeland terrorist attacks, nuclear war. Last year Wall Street's mega-profits came from huge risks in the secretive global hedge fund game. Reminds us of Long-Term Capital Management, a secretive hedge fund: In 1998 LTCM's highly leveraged trading nearly triggered a global economic meltdown. Our new Secretary of the Treasury is also a big player in high-risk global hedging: Could he push America over the edge? You don't know, do you?

Folks, the toughest decision any investor must make is to act responsibly. But you'll never mature if you don't stop following the "experts" and take full responsibility. It's your money, your retirement, and in the end, you, not the gurus you listen to, are stuck with the gains or losses.

So remember the wisdom of Lao Tzu: "He who knows others is wise. He who knows himself is enlightened." What do you know?

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