Hi Guys,
One way to investment riches is to choose the right expert to follow. That’s easily said, but practically impossible to implement.
Experts such as mutual fund managers, Hedge fund managers, market gurus, and institutional investment advisors mostly share the same unimpressive record that individual investors also own. That’s definitely not an endorsement. In fact, simple buy-and-hold Index strategies often outdistance these expert cohorts over the long term.
Yes, there are some exceptions, but they are few as measured by percentages, and a challenge to identify beforehand. Those that are especially attractive winners today often suffer hard falls in the near future. Performance persistence seems like an unassailable hurdle.
In a recent post by Ted (who else?), an article titled “Consultant: Hedge Funds ‘Integral’ to Corporate Pensions” the following claim was made: “Of the 11,000 hedge funds on the market, less than 5% actually merit institutional capital, according to Cambridge Associates.” Those low odds make the search task a real challenge.
What are the winning down-select criteria? I don’t know and most institutional advisors are in a similar position given their poor record. From another Ted post, “Institutional Investors are Delusional”, their expectations and projections seem excessive and history shows they frequently depart from reality.
Mark Hulbert suggests he has a workable approach. Here is a Link to an article he published in March (likely referenced by Ted) that identifies a potential solution:
http://www.marketwatch.com/story/you-can-easily-mimic-a-hedge-funds-performance-without-the-blowups-2016-03-22I am not convinced that his method really works. Again, easily said, but difficult to implement. Much stuff looks great on paper, but doesn’t function all that well when actually tried. The method that Hulbert reported was researched and recommended by Mebane Faber. Basically, it depends on the persistency of past superior performance. That works until it stops working.
Remember Bill Miller’s 15-year mutual fund out-performance record and then followed immediately by a big league blunder. Since that dismal performance he has recovered some of his market mojo. He also has somewhat subdued his wild aggressive swing for the fences commitments. He now recognizes the possibility of errors.
I do believe that the professionals have the potential to leave most average individual investors in the dust. They have useful internal contacts, their intense work ethic, their research teams, and their research access that do benefit them. Even with these advantages however, beating the market remains a daunting challenge for them. This is prime evidence of just how difficult the job is. Why is this so?
One likely answer is that although professionals enjoy an advantage that tips the odds a little towards them, this advantage is overwhelmed by their (and our) inability to forecast the future. That prediction uncertainty simply swamps any and all informational,, organizational, and study pluses. Phil Tetlock's multiple studies demonstrate that experts are not expert enough.
Edwin Lefevre reportedly said: “If all men profited by experience, the world would be peopled exclusively by the wise”. The evidence says that it ain’t so. We keep searching to find that elusive expert while simultaneously ignoring what history teaches.
There is a simple, available, and attractive alternate option: Indexing a major portion of our portfolios. In most instances that simple strategy delivers some incremental reward towards market returns. More and more private investors and institutional agencies are adopting this basic strategy.
Best Regards.
