An investor in an S&P 500 index fund in 2015 must feel like a guy just stepping out of the car at Disney’s Space Mountain ride.
There were a lot of ups, downs and crazy turns, but he ended up right back where he started. Despite the bone-rattling volatility, the market’s return this year has been essentially zero.
At a holiday party the other night, a friend confessed that he wished he were smart enough to earn great returns even in a flat market like this one.
[ad#Google Adsense 336×280-IA]He seemed surprised when I explained that many of the supposed “brilliant people” were doing far worse than him.
For example, hedge fund managers have a reputation as some of the world’s savviest investors. But it is largely unearned.
There are thousands of hedge funds out there, but the media focuses only on the handful that give outsized returns. And those names change from one year to the next.
For example, from March 2009 (the market bottom) to October 2015, the MSCI World equity index, including dividends, returned 173%, while the HFRI composite hedge-fund index rose only 52%.
This is not just cherry-picking. In the previous bull market from 2002 to 2007, the MSCI World returned 156%. HFRI returned 84%.
Yet some folks line up to pay a 2% annual management fee and surrender 20% of net profits. How wise is that?
You’ve probably also heard about the supersmart guys who run the large university endowments. And, indeed, a few have had some success in the past. But was it skill or luck?
Lately it has been looking like luck. From July 2009 to June 2015, the top five Ivy League endowments – Harvard, Yale, Princeton, Columbia and the University of Pennsylvania – earned an average return of 59%. Over the same period, the MSCI World returned 112% and the S&P 500 returned 154%.
In my previous life as a money manager, I had hundreds of smart clients. (In our highly competitive world, you have to have a little something extra going on upstairs to earn a high income and accumulate enough capital to invest.)
Yet many of them struggled. Some were good at taking out gall bladders or running a chain of dry cleaners, but didn’t have the first clue how to invest. Others were overconfident – or too emotional when the markets turned rocky.
“Don’t hesitate to take any short-term capital gains,” an anesthesiologist once told me. “I’ve got enough losses carried forward to last me forever.”
Why do so many smart people struggle in the financial markets?
Take Albert Einstein, the universal symbol of genius.
He discovered the theory of relativity, won the Nobel Prize in physics, and made scientific advances in gravity, cosmology, radiation, theoretical physics, statistical mechanics, quantum theory and unified field theory.
Yet he lost his investment capital – including his Nobel Prize money – on bonds that defaulted. For all his genius, he was a failure as an investor.
Why? Because successful investing is partly about having great insights, but it is also about following a proven system and responding unemotionally to ever-changing events.
Warren Buffett got it exactly right when he said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”
A smart strategy is required, yes. But so is patience, perspective… and a cast-iron stomach.
And those are likely to be essential once again in 2016.
Source: Investment U