Or Why Smart Money = Dumb Money.
Intelligence is what helped humans thrive over time and through adversity. It’s what distinguishes us from the rest of the living creatures on the planet. But while this may be so in general, I’m not sure it’s true in every field. The accessibility of knowledge, the rise in the standard of education and the spread of opportunities has leveled the value of intelligence in some contexts to the point that being clever can actually be dangerous.
During a brief stint in proprietary trading in the mid-eighties my boss (one of the two most brilliant superiors I’ve ever had) told me the story of a group meeting she once participated in. The topic was to define the qualifications in ideal candidates for hiring in a trading position at the bank. Usual culprits soon sprang out: university attended, length of educational training, previous experience, IQs, demonstrable success, number of published works, hobbies and favorite snacks. Someone then half-jokingly wondered aloud what role luck usually has in a trader’s career. ‘Heck,’ my boss reportedly said, ‘from any batch of candidates give me the ten lucky idiots; you can keep the rest.’ I don’t recall why she told me the story, maybe we were discussing my compensation, but it was an eyeopener. She also mentioned once ‘not to worry about what the ‘smart money’ is doing: smart or dumb is not the point; consistency is.’
Few realize an obvious contradiction: it is precisely because some of the smartest and best trained practitioners lurk within the asset management profession that, over time, it has become almost impossible to beat the market on a regular basis. Think of it, if you wish, in terms of a question: what is the likelihood that YOU are smarter than the rest of them on a regular basis? I hate to deflate you career expectations, but the answer is ‘close to nil’ at least for the foreseeable future. Much later, perhaps, the number of active managers will have dwindled enough to make it easier to succeed. But that is for the 22nd century at best.
Hence, the logic of indexing: avoid hustling, keep it simple, save money, enjoy life and talk to your children more often.
This conclusion is a problem for investment professionals: if the above is correct, how can they make a decent living? More precisely, how can they justify making enough money to support their current standard of living? The answer is similar as when investors ask how to generate enough income from a portfolio in the current low interest rate regime: adjust your spending or use up your capital. Dreaming of making more money ‘actively’ is futile.
Do yourself a favor: if you haven’t already, read Nassim Taleb’s Fooled by Randomness, not just to learn something about investing but simply to understand life better. And if at the end you still harbor the urge to try your hand at stock picking or at timing the market, well what can I say?
A very Merry Christmas to you.
Roberto Plaja, December 22, 2020