tekboy,
The issue here isn't individual vs. professional investors, but rather whether anybody can reliably beat the averages on a long-term, risk-adjusted basis.
I couldn't disagree more. The risk-adjusted basis is only for the academics. I wish I could point you to David Gardner's piece about risk-adjusted thinking because he expressed it so much better than I can. I do remember that his piece mentioned that if we had considered the prospects of putting a person on the moon from a risk-adjusted basis we never would have tried.
One of the reasons I mentioned that I don't think it's random issues we're dealing with, that instead it's an inability to properly model the immensely complex and dynamically changing sets of factors, is because it's impossible to determine the risk-adjusted aspect of each person's limitations and capabilities. Fortunately, humans aren't quantifiable. Therefore, there is no way to accurately adjust for risk.
More important though is that I'm not the least bit concerned about beating the market averages on a risk-adjusted basis. I'm only concerned about beating them. If I beat them over long periods of time, I don't care how risk-adjusted the returns are.
When I began investing seriously, I decided that if I couldn't reasonably consistently beat the broad market I would simply invest in an index. I still think that should be everyone's approach. Try it for years and if you don't beat the indexes, join 'em.
The only money I invest is money that I can risk losing. Because I can risk it, I don't adjust for risk. (That's NOT to be confused with my attempt to walk a fine line of achieving the greatest reward with the least possible risk, which is why I'm attracted to Gorilla Gaming.)
Extraordinarily few mutual fund managers have been able to do so, despite tons of information, lots of effort, and huge incentives. ... Anybody who is buying individual stocks as more than a gamble, it seems to me, should be able to explain why he or she is likely to do better than the pros.
I can explain it. You can. Each of us can.
Simply turn to page 19 of the paperback version of Beating the Dow, by Michael O'Higgins, where you'll find the beginning of Chapter 4, titled "How the Pros Try to Beat the Market -- and Why Most Don't Succeed." We, the individual investors, are not limited by the set of rules and expectations that constrain the pros. That's why we can beat them.
By the way, O'Higgins favorite reason that most pros underperform is because "they make the process too complicated." In my mind, Gorilla Gaming makes the process reasonably simple:
1) Identify growth industries
2) Identify companies with proprietary, open technologies that are forming strong value chains
3) Hold for the long term.
I can't help but note that this conversation began with the concept of trying to time the rise and fall of stocks, a process that adds complication. Why add complication when the pros suffer from it? Why not focus on simplifying the process as a means of beating the pros and the indexes?
--Mike Buckley |
