Defined within the realm of the statistical Bell Curve, the long tail would reside in the skinny tail at the borders. The long tail, in regards to goods and services, refers to the evolution away from mainstream offerings towards more niche products and services. With the internet drastically reducing the costs of establishing distribution channels, the ability of entrepreneurs to focus more on the longtail sector to fit their customized needs is gaining increasing appeal.
However, almost no one speaks of the longtail of investing. To me, longtail investment strategies are the strategies that do not heavily rely on fundamental or technical analysis, but exploit other strongly predictive factors to produce not only superior returns to traditional investment strategies but also investment opportunities with far better risk-reward paradigms than those produced by traditional investment strategies. Here are 10 reasons why the longtail of investing is the only way to build wealth.
(1)You will never achieve the level of wealth you desire by handing your money over to a large investment firm.
The vast majority of private investors hand their money to large institutions and allow them to invest their money for them. If this were truly the best way to achieve financial freedom, then almost every one you know would be ecstatic with their financial consultant. Think of how many people you know that absolutely rave about their financial consultant.
The fact that 90% of people you know do not rave about their financial consultant should tell you that niche investment strategies, or longtail investment strategies, are far superior. The ones that are happy with the large investment houses already were independently wealthy before they sought out their help. Think about how many people you know that have ever told you, “I wasn’t wealthy before, but thanks to my investment firm, I am wealthy beyond my dreams now.”
(2)Thanks to evolving information technology, there are many better and more highly predictive means of making investment decisions than just utilizing fundamental and technical analysis.
Though people have been really slow to grasp this, once they do, longtail investment strategies, like those invented by SmartKnowledgeU, will boom. There is no doubt that the level of top-notch financial, political and corporate information available to the average investor has increased by leaps and bounds within the past decade.
There is a virtual treasure map that was created by the flattening of the world over the past decade to selecting stocks that are poised to explode. However, because the largest, most powerful investment institutions in the world have kept the masses of investors fixated on traditional investment techniques such as value and fundamental analysis, the longtail of investment strategies is currently much further behind in its developmental phases than it should be.
The best analogy I can use when explaining why people have ignored the long tail of investment strategies is to compare it to the incredibly slow adoption of Internet Protocol Version 6 (Ipv6) by the United States. When China started preparing its country for Ipv6 a decade ago, the benefits in increased security and its added value properties in e-commerce were evident even back then. However, people in the U.S. were comfortable with the lesser Ipv4 so did not take any action until the progress and superior internet and business capabilities of China, Korea, Taiwan, and Hong Kong finally embarrassed the U.S. enough to move forward and catch up with Asia.
I see the same thing happening in the educational realm of investing. Everyone is comfortable with the traditional investment strategies that have been propagated for the last several decades so nobody sees a need to move forward even though much better strategies exist today. Just as with Ipv6, the world will eventually realize that the safest and best means of investing money reside in the longtail, and they will eventually adopt these strategies.
(3)With so much investor skepticism of corporate integrity sparked by past accounting scandals at Enron, WorldCom, General Motors and the like, and the current, ongoing backdating option scandals, investors will increasingly seek alternate means of making investment decisions other than crunching numbers that they feel are untrustworthy.
Furthermore, technical analysis often yields false positives as well. A chart will show indexes that appear bullish having just broken through a ceiling of resistance only to have the index turn back downward for a prolonged period of time, or a chart will appear bearish having just broken through a floor of resistance only to turn around and begin another bullish ascent.
In fact, you have seen some of these turnaround trends with some of the technical posts that I’ve placed on my blog in previous months. In fact, that is why I always state that I never rely solely on technical indicators to make my decisions. I rely only on technical indicators to confirm or dispel what my long tail investment strategies tell me. Of the three types of analysis, fundamental, technical and long tail, long tail investment strategies yield by far the least amount of false negatives and false positives. That’s why I rely on them so heavily.
This sentiment will lead to an evolution of longtail investment strategies, and the discovery of more efficient and better predictive means of making investment decisions than even those that already exist. Even current longtail investment strategies, such as those utilized at SmartKnowledgeU are constantly evolving as access to reliable information increases every year. Making decisions as if you were a fly on the wall of boardrooms is no longer a fantasy. It is possible, thanks to the evolution of the information landscape.
(4)With the growth of blogs and pure information sites on the web, the stranglehold of global investment myths, including the Modern Portfolio Theory of diversification, will soon be exposed for what they are – cleverly disguised sales strategies posing as investment strategies.
Once people realize this, longtail investment strategies will gain wider acceptance, much like acupuncture and herbal medicine eventually gained credibility as healing regimens in the schools of Western medicine.
The new information age has stripped many accepted investment strategies such as diversification of much utility when attempting to build wealth. Furthermore, it has also rendered such beliefs as an inability to time the market and the efficient market model as mere myths. This has been proven time and time again by investment sites such as SmartKnowledgeU that have called for steep market corrections in certain global markets and in asset classes like gold with consistent accuracy.
(5)Wider acceptance of alternative, longtail investment strategies that far outperform those utilized by global investment firms will happen as word of successes via these strategies spread throughout the world via the internet.
The internet distribution channel can and will be used to change the mindset of investors.
(6)The Do-It-Yourselfers are Growing – With the success of books such as Stephen Covey’s “The Eight Habit” that emphasize personal accountability to achieve excellence versus handing control over to someone else, cultural shifts will happen whereby people will seek to seize control over their own financial future versus just handing their money to a firm to manage.
As this cultural shift happens, multitudes of people will realize that they are shorting their returns significantly every single year by handing their money to global investment houses.
(7)The flattening of the world and accessibility to previously inaccessible investment information will undoubtedly yield an increasing amount of investment strategies that reside in the longtail.
People will realize the foolishness of believing in the one investment strategy thrust upon them by global investment houses for the past half of century as “the only viable and safe way to invest.” If the younger generation takes an interest in investing, adding their creativity to the investment arena will result in explosive growth in the longtail of investment strategies. However, since the odds of this occurrence are quite low, a more gradual shift towards niche investment strategies is much more likely.
(8)The explosion of social networking sites like YouTube, MySpace, Friendster, Squidoo, Digg, and so forth, will amplify the viral marketing of longtail investment concepts.
Again, ignorance of longtail investment strategies causes fear and hesitancy to use them. Viral marketing of longtail investment concepts will increase millions of investors’ comfort level with these different and unique concepts.
(9)People are ultimately interested in returns, no matter how much global investment firms try to separate themselves from their competitors with smoke and mirror service claims.
All the gratitude for luxury box suites at Los Angeles Lakers games, suites at the Four Seasons Hotel, conferences at world-class golf courses and resorts will quickly wither once people realize how much more money they are earning with longtail investment strategies.
(10)Again, because people will readily abandon all the perks they get as a preferred client at a large investment firm for far superior returns on their portfolios, longtail investing will eventually reach a critical mass.
Eventually the longtail of investing will migrate towards the center and become the mainstream methods of investing, though this may take several decades to occur.
J.S. Kim is the founder and managing director of SmartKnowledgeU
By understanding the performance of socially responsible stocks, individual socially responsible stock, the socially responsible investor can gain the profits of socially mindful investing, either through individually socially responsible investments, or by engaging with socially responsible investment funds and socially responsible funds. In addition, the article also confers the sustainable investing approach in investing with ethics, green investing, values investing, and socially responsible investments.
Although socially responsible investing has expanded dominance in the last numerous decades, countless socially responsible investors are still under the feeling that to invest in social good, they must decline certain levels of portfolio performance. However, with the confirmation escalating that socially responsible investment funds strictly match, if not surpass, their market counterparts, many socially responsible investors are capitalizing their earnings – and their involvement to social good.
Long-term vs. short-term corporate focus
Socially responsible investing (SRI) takes the long term vs. short term investment discussion to a socially alert investing level. In comparison to countless corporations who take advantage of natural assets and human labor for short-term profits, a socially responsible stock drives under long-term natural sustainability, lending itself well to green investing. For example, the oil magnates such as Exxon-Mobile and Chevron have experienced exponential expansion in the last numerous years. However, where will these corporations be in 10 or 20 years – when the oil rigs are pumped dry and clients have switched over to hydrogen-fuel cars? In stark contrast, green investing stress the long-term sustainability of corporate social responsibility on the environment, society, and monetary well-being.
Overarching SRI principles
The extensive investment ideology of socially responsible investing are conceptualized based upon unstable techniques of social investing analysis. The execution of social investing in Europe is usually diverse than in the United States, but the underlying essentials are based upon using a set of foundation values. Depending upon the socially responsible investments portfolio or socially responsible funds, the SRI analysis may be based on one or several of the following criteria:
1. Sustainability Practices : This socially conscious investing perspective analyzes whether a company’s business practices are sustainable in the long term. If the business operations negatively impact the environment, economy, communities, or human welfare, then it is not considered sustainable investing for long term profitability.
2. Corporate Governance : This socially responsible investing component analyzes the company’s policies on employee, community, investors, stakeholder, and environment relations. Social investment’s mutual authority analysis is a separate process from the company’s financial outlook.
3. Religious Beliefs : Considered the original father of socially conscious investing, religious beliefs have screened many portfolios. For example, a Catholic screened socially responsible investing portfolio may divest companies that produce contraceptives. Both Christian and Muslim screened socially liable funds are prevalent, imparting strong religious beliefs onto the social investing analysis of opportunities.
4. Public Policy : Geared for socially responsible stock portfolios that include international holdings, the public policy filter analyzes foreign governments’ actions, either on an individual country case-by-case basis, or based upon an international mandate, such as a ban by the UN or NATO.
Socially responsible investment funds’ performance
Beyond the desire to contribute to social good, socially responsible investors are seeking SRI investment performance. Values investing demonstrate that socially conscious investing can be done quite profitably. In fact, in some market conditions, socially responsible funds outperform their market counterparts.
The Domini 400 Social Index (DS 400), the socially responsible investing industry benchmark, has outperformed the S&P 500 since its inception in 1990. According to KLD Indexes, as of November 30, 2007, the DS 400 has enjoyed 11.75% annualized returns, leading ahead of the S&P 500’s 11.21%. The DS 400 screens its index for socially responsible stocks based upon environmental, governance, and social filters, and within its index, there are 250 S&P 500 represented companies, 100 companies not on the S&P 500, and another 50 socially responsible stocks that have demonstrated significant strength in social investing filters.
With the sustained long-term SRI investment returns in the socially responsible investment funds, such as the DS 400, socially conscious investing can match or outperform its market counterparts – dispelling the myth that a socially responsible investor must sacrifice performance for social consciousness.
The risk exposure of socially responsible stocks
However, when comparing SRI indexes against market benchmarks, the question begets: does the performance of socially responsible investment funds come at a higher portfolio risk than its market counterparts?
Considering the rigorous screens of socially responsible investing portfolios, the socially responsible stocks are naturally geared towards companies with smaller market caps. Theoretically, the lower market caps contribute to a higher volatility and beta for the overall socially conscious investing portfolio. For example, the Domini 400 has a weighted average market cap of 83% of the S&P 500.
Beta Coefficient: measurement of an investment’s volatility against the market
However, instead of reducing the overall beta, the socially responsible investments screens minimize the individualized corporate risk. By evaluating a socially responsible stock based upon its governance, sustainability and relationship with stakeholders, social screens reduce the economic risk of the individual corporate holding. For example, by not choosing to invest in tobacco, socially responsible investors shield their portfolios from the negative performance factors of lawsuits. Or, by selecting companies that have good relations with their employees, the negative financial reprimands of strikes are curtailed from the socially responsible investment portfolio.
Risk and volatility are not necessarily synonymous in the world of financial portfolios. Whereas beta may be a good indicator to evaluate the short-term probability that a negative event may occur, this does not specifically analyze the individualized corporate risks. Though socially conscious investing portfolios may have higher betas, the risk of the socially responsible stocks in the portfolios experiencing financial degradation is more limited than the market benchmarks.
Alpha: risk-adjusted measurement of an investment’s excess return over “risk-free” instruments
One of the most compelling factors of socially conscious investing is that despite its demonstrated increased returns, the risk does not necessarily increase. Social investing may be one of the few exceptions to the risk-to-reward ratio. In fact, the performance of the socially responsible funds may not be fully indicative of its true earnings, once the lowered individualized corporate risk is weighted. After adjusting for both short-term and long-term risk, social investing’s alpha may be stronger than the numbers indicate. For more information visit our website http://www.sristocks.com
December 2, 2009
Product Description
With 16 priceless lessons that reduce risk through proper planning, this powerhouse guide removes the mystique from successful investing by helping readers switch from thinking poor to thinking rich.Amazon.com Review
The rich are different from the rest of us, if for no other reason than U.S. tax and securities laws allow them to invest in ways that keep us from catching up to them. That’s why 90 percent of all corporate shares of stock are owned by 10 … More >>
Rich Dad’s Guide to Investing: What the Rich Invest in, That the Poor and the Middle Class Do Not!
I’m thinking about investing in stocks and bonds but I don’t know the first step to take in investing in one. Do I go through a broker? How do I find one? How do I find one that won’t jip me out of money?
Older Posts »
