In celebration of Yogi Berra’s 89th birthday on May 12, we’re continuing our Yogi-isms series, honoring the man whose unconventional wisdom continues to lend new layers of meaning to life and, in particular, the investing world. In case you missed it, here’s the first set of Yogi Berra quotes published in May.

“In theory, there is no difference between theory and practice. But in practice, there is.”

Theory and practice often clash with each other. In theory, we’re all rational investors who make logical decisions in an efficient market. In reality, we’re rash, we chase performance, and we throw in the towel too quickly when things look dicey. The lack of emotional discipline is often the obstacle that keeps the average investor from reaching his or her long-term goals. Advisors play an instrumental role in bridging the gap between theory and practice.

“Ninety percent of the game is half mental.”

One of the biggest catalysts that veer clients off course is emotion, namely, when greed and fear swing to extremes. The desire to be “in the know” or to ferret out uncertainty almost always intensifies an emotional situation. Advisors help clients know themselves, establish clear goals, and put safeguards in asset allocations to account for biases.

“If you can’t imitate him, don’t copy him.”

It’s not uncommon to see old strategies tweaked and repackaged as an improvement on an old idea, such as smart beta. Trouble arises, though, when clients buy into a “better” idea under a misunderstood premise. The trade-off between risk and return hasn’t changed, nor has the definition of passive investing. Smart beta is not a passive strategy. Advisors can help clients evaluate such investments in the appropriate context, as actively managed strategies.

“The future ain’t what it used to be.”

As the boilerplate disclaimer states, “Past performance is not an guarantee of future results.” Despite its ubiquity, very few investors heed its caution. Our research revealed that even successful actively managed funds experienced long periods of inconsistent returns on their road to outperformance. When it comes to evaluating an investment, it’s more advantageous to assess a strategy based on its potential to generate excess returns rather than on its past returns.

What’s your favorite Yogi-ism? We welcome comments on how you apply Berra’s wisdom in your advisory practice.

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Quotes are from Yogi Berra, The Yogi Book (New York: Workman Publishing, 1998) and Yogi Berra. (n.d.). BrainyQuote.com. Retrieved June 30, 2014, from BrainyQuote.com Web site: http://www.brainyquote.com/quotes/quotes/y/yogiberra141506.html

 

Notes:

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.