Why Is it So Hard to Earn Respectable Investment Returns?

There is an old saying that goes something like: “If one continues doing what one has always done, one should expect to continue getting what one has always gotten.” The passive investor’s corollary to this saying would go something like: “If one does what the majority of investors are doing, one should expect to get the results that the majority are getting.”

Although these may not be the most eloquent of sayings, I trust you get the point.

The majority of passive investors are invested in stocks, bonds, and mutual funds. A sizable percentage of these investments, although certainly not all, represent investments made with retirement account funds.

It’s a fact of life that only a small percentage of investors will enjoy the best returns. The vast majority of investors will earn only modest returns on their investments, while some segment will experience net losses. If this concept were to be demonstrated graphically, on a Bell Curve, the vast majority of investors — those who will earn only modest returns — would be in the center, at the top of the curve. The investors who earn the best returns would be on the“right tail” of the curve, while those who experience net losses would be on the “left tail” of the curve.

However, unlike with traditional Bell Curve analysis, the Investment Bell Curve will seldom be symmetrical. The left tail of the Investment Bell Curve — representing net losses — may exhibit what is known as a “fat tail,” while the right tail — representing the best returns — will be fairly “skinny.”

What does all this mean? Quite simply, it means that only a small percentage of investors will experience the best returns. The vast majority of investors will, over time, experience only modest returns, while a significant number of investors will experience net losses.

To put a slightly finer point on this idea, it means that the vast majority of investors will not experience the best returns. Or, as we said earlier, “If one does what the majority of investors are doing, one should expect to get the results that the majority are getting.”

Now that we have identified the problem, what should we do about it? The answer, we submit, is to look for investment strategies that are both theoretically sound, have a track record of success, and which are not being pursued by the majority of investors.

The typical investor may not, at least initially, be comfortable with such investments. The “secret” for the investor who wants to be more successful than the majority is for the investor to leave the investor’s “comfort zone” by being open to critically analyzing investment ideas and strategies that may be new or unfamiliar to the investor. As the saying goes, “in order to grow, one must step outside of one’s comfort zone.”

One investment strategy that we believe can position an investor in the sought-after right tail of the Investment Bell Curve, rather than in the top or left tail — where most investors reside — is to invest in non-performing notes which are secured by real estate (NPNs).

Moving oneself to the prosperous and profitable right tail of the investment Bell Curve is not easy. It takes a willingness to think independently and do what others are unwilling or unable to do. To be successful, you must take the initiative; no one will drag you to financial independence against your will.