Beating the Market: How Are We Doing?

Three items for your consideration (as Rod Stering used to say):

First, a Morningstar review of the fund managers proposing to “beat” the market through complex hedge fund like strategies, complex macro trend modeling and/or a degree of gut instinct they hope will tell them when to buy and when to sell different asset classes and derivatives en mass. The result is supposed to be either superior returns at the same volatility as the overall market, or lower volatility with the same returns as the market. So how did these 100+ fund managers do?

As a point of reference please check out the February/March 2012 issue of Morningstar Advisor magazine.

So what is going on here? After spending many millions of dollars collectively on research, these investment professionals entrusted with  billions of dollars, had collectively underperformed a basic Moderately Aggressive portfolio by the vary measures they had proposed they would beat it.

Might I suggest two additional pieces to ponder:

First, the story of the Norden Bomb Sight as presented at TED by Malcolm Gladwell. This is a must see in a much broader sense as it relates to the folly of human hubris. It matches well with the TED talk by Katheryn Schultz on “Being Wrong”. While unsettling, very important to consider. Guess this is part of the reason I am known among my family and friends as “The Buzz Kill”

Secondly, the following diagram, which is so much the more obvious in light of the above two pieces. Often it is very challenging to believe that, even though we can see how the hubris of others caused them to make such obvious but painful mistakes, it is almost inconceivable that we would be the victim of this self inflicted malady.

If we can embrace the notion that the zone “Things That Matter” within the zone of “Things you can control” is very small, we best not waste too much of our time with the rest of the stuff in the “Things you can control” universe.