Only a handful of investment managers have shown the ability to beat markets consistently. No one identified them before they did this, only after.
A cognitive bias I look for in prospective clients is a mind-set I call the “angle-shooter.” Poker players know this term well: it’s a person looking to adhere only to the technical letter of a rule while violating its spirit and all types of behavioral norms. Put another way: it’s a person ready, willing and able to be a complete jerk to gain a perceived advantage over the short run.
This is different from a cheat. Cheats in casinos and card rooms go to jail eventually. Cheats in your home game quickly find themselves without invitations or friends. An angle-shooter is not a cheat: they follow the absolute letter of the law, but go no further.
Part of the mind set of an angle-shooter is a fundamental belief that acting this way is necessary to win. They believe that winning requires actions that others are not willing to take. In finance and investing at least, they could not be more wrong.
The two greatest college basketball coaches of all time, John Wooden and Pat Summitt, used to spend their summer breaks at coaching clinics teaching all of their techniques to other coaches. They would show them the practice plans they used, game plays, everything. Their approach to coaching was an open book. The key to their success was not some particular insight they held, but rather their ability to apply this knowledge consistently. Their mastery of the information was what mattered, not the information itself. We think this applies to a great financial experience as well. The successful investor values execution over information.
“If more information was the answer we would all be billionaires with perfect abs.” — Derek Sivers
So back to our prospective client. Our angle-shooter investor believes there exists somewhere some set of information that grants superior insight and therefore superior investment returns. This mind-set also requires a willingness to ignore actual investor results.
About those 5-10 investment advisors I can think of who have been able to beat the markets consistently: congratulations on their good luck. We know of their history, but we also know that tells us nothing about their future prospects.
The most celebrated mutual fund manager of the past 25 years is probably Bill Miller of Legg Mason, whose fund famously beat the S&P 500 index for 15 consecutive years from 1991 through 2005. Since that time the fund has given back much of its out-performance and disappointed investors have pulled assets (after the fact, naturally).
The better course is to believe in the power of the market to deliver the returns you actually need to reach your goals. People with the best outcomes are usually the ones who obtain that return as efficiently and inexpensively as possible.
The Melt Up
Our clients at Aegis have heard us say it for years: we cannot expect returns from...