The 14 Truths You Must Know When You Invest

Most people are highly risk-averse, yet they continue to take unnecessary risk by putting money in actively managed funds.

On a risk-adjusted basis, the numbers are far worse than people think. Over 10-year periods, the people who outperform the market on an after-tax basis, although you can't identify them ahead of time, they outperform by about 1% a year. The people who underperform do so by 3% a year. But the key point is, there are 11 times as many losers as winners.

You have this problem: If you win, you win by a little. If it's David Baker, you lose a lot.

Truth 3: If The Skilled Pros Don't Succeed, Why Should You?

All academic evidence points to this: The pros can't beat the market. Why should you think you can? Here's my analogy, which is borrowed from a scene in the movie Tin Cup. Let's say Steve Schurr gets the chance to play a round of gold with Tiger Woods.

On the fifth hole, you hit a lousy shot and get stuck in the brush with two trees between you and the green. Tiger is so unlucky that the wind blows his ball away and it lands right next to yours. Now, you both have two options, try to hit it through the sliver between the trees and onto the green, or play it safe and hit it back on the fairway.

Tiger decides, I think I can just squeeze it between the two trees. He tries once, and hits a branch. The ball rolls back. He tries eight more times and fails. On the 10th try, Tiger hits the ball just right and it goes between the trees and lands right in the cup.

Now, what's the winning strategy for Steve Schurr? The best in the world succeeds one in 10 tries, do you think you can make it? No rational person would try to make that shot. Only an irrational person who lets his ego get in the way would say, "Hey, Tiger made it, why can't I?"