Hi Guys,
Are we brilliant or lucky Investors?
Over the weekend, Jason Zweig issued an addition to his The Intelligent Investor WSJ column titled “Are You Brilliant, or Lucky?”
Here is the Link to that insightful and entertaining column:
http://online.wsj.com/article/SB10001424127887323316804578165143799397184.html?mod=googlenews_wsjEnjoy.
Not surprisingly, most of us fall in the spectrum that exists between the endpoint extremes of total brilliance and completely lucky. That is especially true when we compete in events (investment decisions) that are dominated by incomplete information, uncertainty of future outcomes, and behavioral biases.
Zweig highlights some of the concepts and interpretations frequently advocated by Michael Mauboussin, professor at Columbia University and Chief Investment Strategist at Legg Mason.
Mauboussin is a strong proponent of a reversion-to-the-mean performance when competitors are of roughly equal capability. He often uses sports analogies to emphasize and illustrate his investment wisdom
For example, he sees it far more difficult for a ballplayer to hit over a 400 batting average today compared to when Ted Williams last accomplished that feat decades ago because all ballplayers have improved to an extent that the skill levels are approximately the same for all so that luck becomes a more dominant factor with regard to outcomes.
Mauboussin suggests that an outperforming skilled fund manager who has recently outpaced an Index is likely to revert towards that Index average, although if he is truly skilled beyond his rivals, he will likely still out-dual those less talented competitors over the long haul. Time and patience are winning investor characteristics.
Michael Mauboussin is a very attractive, popular, and articulate TV visitor on financial shows. Within the last year, he has appeared on several well-known financial programs including WealthTrack and the Steve Forbes Intelligent Investing program.
Here is a YouTube Link to a Steve Forbes interview conducted about a year ago:
Enjoy. It is worth a visit. We all need both skill and a little luck in the investment world. Let’s wish that “Luck will be a Lady Tonight.”
To incompletely answer the original question, we need not be brilliant, but we surely need a little luck in this complex investing environment.
Best Regards.
Comments
Thankfully, all three provide an alternative to blissful ignorance which, personally, I'm not rich, blonde or good looking enough to pull off right now...but, I'm workin' on it!
HY..."taking some form of action"...thanks for this point...I always like the saying..."Lead, follow or get out of the way"...I often think of myself...needing to remind myself to overcome the urge to..."don't just do something...stand there".
Sorry folks, but I do not consider any current MFO participants , acting individually or as a team, brilliant. I definitely include myself in that harsh assessment.
On the positive side of that hard judgment is the realization that some very famous financial wizards and fund managers have made some infamously bad investment decisions. Brilliance does not automatically guarantee successful investment outcomes.
Personally, I reserve the brilliance accolade for the rare genius in any challenging profession whereby giant understanding or unexpected progress is realized.
I would not even award the brilliant accolade to investment heroes like Warren Buffett or Peter Lynch. They surely achieved above average outcomes, but the statistical law of large numbers suggests that a few outstanding winners will always exist. These two giants just happen to have held the winning lottery tickets. Buffett and Lynch both experienced some bad outcomes, but generally survived their failings. Many others, Legg Mason’s Bill Miller comes immediately to mind, did not. Such is the luck of the draw.
Overall, the mutual fund industry has generated a ton of data that supports the notion that active mutual fund management is a challenging, a daunting, and an unpredictable success assignment that defeats just about everyone who accepts that task, given an extended measurement time horizon.
A triple whammy seems to operate in the mutual fund business that limits success. A huge assembled performance database documents this sub-par history. That database includes institutional entities, but especially, it encompasses individual investors. Smart investors are competing against smart people and tend to neutralize each others talents.
First. as a cohort, in almost all mutual fund categories, passive Index funds typically outperform actively managed funds. Standard and Poors’ SPIVA and Persistence scorecards, prepared annually and for extended timeframes, document this dismal record.
By a huge margin that survives extended measurement time periods, an overwhelming percentage of Index products generate higher returns than their actively managed category counterparts. This finding is consistent over time and includes both equity and bond categories.
Second, on an individual level, comparisons of time integrated fund returns greatly exceed returns accumulated by private investors. Morningstar studies, as well as other respected investment agencies, document this finding. DALBAR surveys develop similar conclusions. Most likely because of a poor trading discipline, entering at highs and exiting at market lows, private investors have accumulated a consistent history of disappointing performance when compared against the funds that they hold in their portfolios. We are often late to the party.
Given that (1) active funds typically underperform passive equivalents, and that (2) private investors do not attain even the results of their selected funds, private investors are not rewarded with market-like average returns. Sadly, we settle for a fraction of what the overall market produces. And that happens year after year after year. As John Bogle observed, the croupier extracts his fees and substantially reduces the payout pot.
The third part of the whammy is the very asymmetric nature of the rewards distribution. For those rare cases when outstanding positive Alpha (excess returns) is realized, it is a modest level, like a few percent above a proper benchmark. For those many more negative Alpha scenarios, the undersized returns are far more negative than its assigned benchmark. Both the number and the size of the outcomes define the miserable record of the active investment community.
These three whammy components compound to significantly reduce investor payouts annually. What can an investor do? He can do what institutional investors do by committing to a mix that gravitates towards a passive investment weighting. He can choose to direct a larger percentage of his portfolio to low cost Index products.
Couple this wealth eroding triple whammy with behavioral handicaps such as overconfidence, an overweighting recent data bias, and debilitating anchoring tendencies, and it’s not shocking that individual investors do not harvest market returns.
I guesstimate that most MFO members hold a significant actively managed mutual funds mix. I do. Therefore, I do not characterize us at the dizzying heights of brilliance. No, we do not warrant that high an attribute.
But I do believe that the MFO membership share a high level of commonsense. And in many ways, reliable commonsense trumps spotty brilliance when making investment decisions. The race is won by the patient, by the persistent, by the consistent, and by avoiding mistakes. Those attributes are frequently tied to commonsense wisdom. Brilliance is not reliably predictable and is usually not repeatable. Commonsense is.
So by rejecting your likely tongue-in-cheek claims towards brilliance in favor of commonsense wisdom, I am respecting your investment assessments and am granting you a realistic tribute. MFO is populated by smart folks, and I fully enjoy the opportunity to exchange investment ideas and references with you.
MFO is indeed a fun and thought-provoking website that can benefit all investors, regardless of our philosophies and wealth status. I anticipate that acceptable rewards await us in the near future.
Best Wishes.
Given the "noise" of the day-to-day, I think where common sense comes in is trying to have some ability to see "over the horizon". In the short-to-mid term, I think common sense is less and less an element of today's markets, where computers trade instantly on headlines and investors' view of what is "long-term" is massively shorter than what it was 20 years ago. For some institutional investors, it seems as if long-term if tomorrow, mid-term is end of day and short-term is an hour.
Actually, as for the exact specifics, the average holding time of a stock has gone from several years in the 1960's to less than several days now (http://www.businessinsider.com/stock-investor-holding-period-2012-8)
I have I'd say 50% funds and 50% individual stocks (+/-, but that's in the neighborhood), and try to keep a balance between individual names and active management. I do think people have to be diversified across asset classes and globally; the financial media (both large and small - even something like Seeking Alpha) are so US-centric, but it's really a very global economy and I think one can't simply have an all-US or very heavy US portfolio and say that the multinationals have exposure to foreign economies.