The financial media loves to reference the wisdom of “investing pros.” This article is representative. Here’s the headline: Opinion: ‘No disrespect’ to Warren Buffett—but some investing pros say he’s dead wrong about this stock. The “pros” quoted are editors of “top performing newsletters.”
Surely, they must know more than you about investing, right?
The “pros” are amateurs
Roger Federer may be the greatest tennis player of all time. What if you learned that most of the time he couldn’t beat an average club player? Would that change your view of his skill set?
The track record of predictions made by newsletters is even worse. One study looked at 15,000 predictions made by 297 market-timing newsletters over a 12-year period. It found over 94.5% of them went out of business with an average lifespan of only four years.
The authors of this study found “very few newsletters can ‘beat’ the S&P 500…” and “there is no evidence the letters can time the market (forecast the direction).”
Real “pros” don’t pick stocks
Daniel Kahneman is a real “investing pro.” He won the Nobel Prize in Economic Sciences in 2002. His book, Thinking, Fast and Slow, was widely acclaimed and a bestseller.
In a recent interview, Kahneman stated, All behavioral economists are against active investing. He’s opposed to stock picking, market timing and efforts to select the next “hot” mutual fund manager because the market is unpredictable.
The ramifications of these observations are profound.
The daily grist of most brokers is precisely the activities Kahneman believes are counter-productive and harmful to investors.
The amateurs are “pros”
There’s an investing “pro” hidden in plain sight.
Look in the mirror. It’s you.
You probably believe mutual fund managers are “investing pros”. But look at their track record. In almost every asset class, they underperform comparable index funds.
Here’s a glaring example: For the five-year period ending December 29, 2017, 84.23% of large-cap funds underperformed the S&P 500 index.
Think about that stunning statistic. The smartest, best educated, most highly paid fund managers couldn’t figure out which of the largest companies in the U.S. would outperform a “dumb” index that simply bought and held all 500 of these companies.
All you had to do to beat the track record of these faux “pros” is buy a low management fee S&P 500 index fund (or ETF) from a fund family like Vanguard, Schwab or Fidelity.
Remember that the next time you read about what the “pros” are recommending.
They should be relying on your investing expertise.
You are the real “pro.”
Resource of the week
You can read about the views of Daniel Kahneman in this excellent blog post by Robin Powell, published in The Evidence Based Investor.