Disgraced dot-com stock analyst, now resurrected as tabloid honcho Henry Blodget was interviewed yesterday (VIDEO).
Blodget warned average investors for the 1,000,000th time that the playing field is not level, with significant advantage going to the professionals.
I disagree. Sure, there may be an information advantage, but that does not automatically result in superior investment performance, does it? Time and again, we have seen that most mutual fund managers suck, and hedge fund managers make more money from fees than anything.
Everyone in the business reads the same sh*t. All the information didn’t help them back then, and it won’t help now, because no one knows the future. Every person who has a CFA designation knows this. The true objective of professionally-managed funds is to convince you to part with 2% of your money every year, grow Assets Under Management. How do you think so many managers became billionaires? Then they cash out.
Having more information on hand is not the same thing as making good decisions. Faster execution speed means making mistakes faster. Information is NOT the true edge of the professional investor.
Shouldda, Wouldda, Couldda
A member wrote yesterday, asking why one of the model portfolios “loaded up” with gold last week. When Pete pointed out that the final allocation for this week in this particular strategy was 5.21%, it occurred to me that as an investor, one should avoid using terms such as “loaded up”, etc. because making decisions is hard enough.
When any position is characterized in this way — with Jim Cramer being the worst offender when he says “back up the truck” — it is hard to keep risk in proper perspective in the face of uncertainty. Hindsight is always 20/20.
Another member wrote to say that gold is a useless asset, an assertion which that I totally agree with, but if we DIDN’T own gold in a portfolio as recently as a couple of years ago, people would have been so distressed about NOT owning it. The bogeyman has moved on, to Treasuries.
Man against self
We all remember this. We were all taught in English class that every story must have conflict, be it man against man, man against society, man against nature, or man against self.
Every profitable investor, professional or home-gamer, faces the same thing: how to buck your gut instincts and make effective decisions in the face of uncertainty under risk. From decades of evidence, we know people are terrible at this. Really bad.
Our ancient selves survived by taking big risks because they had to: a week without food would result in certain death. Our modern selves get killed in the stock market because the game that never ends: one big wrong-way bet means you are broke before you die.
The only cure for this formerly-useful wiring is to acknowledge that the stock market is not the same as big-game hunting and approach investing as a long-run betting game. Those who want to be “sure” of something end up losing to those who manage risk. That’s just the way the game works.
Because Mr. Blodget stayed silent on the point that really matters, I have shared with you the secret to investment success along with the reason I have zero incentive to evangelize or try to convince you of anything: your losses are my gains.
So there you have it. We have met the enemy and he is us.