Rich folks have interesting hobbies!
On National People's Radio this morning was an interesting story about a million-dollar "bet" Warren Buffett made with a hedge fund manager as to who would win over an eight year period, the hedge fund or the overall market. Buffett looks to be on track to win the bet. I guess this is what those evil 1%'ers do all day long, swim in their champagne-filled swimming pools, light cigars with $100 bills, and make million-dollar bets with each other.
Well, you'd think that National People's Radio would say something like that, after all they are blowing Bernie Sanders on a daily basis. But a funny thing, the people who actually listen to NPR are fairly entirely white, middle-to-upper class, and worry about things like their 401(k) and home values, even as they profess that "Black Lives Matter" and "we are the 99%" (because let's face it, most listeners are actually 1%'ers, as they have a net worth over $1M). But I digress.
But readers have mentioned this to me - that over time, particularly long periods of time, most folks don't outperform the market. If you select your own time interval for evaluation, you can show that you "beat the market" for weeks, months, years, or even decades. But as I noted before, never confuse getting lucky with being brilliant. And Buffett's argument is that the "brilliant" people on Wall Street are just this week's lucky folks, who eventually will break their lucky streak and everyone will wonder why they "lost their touch".
Arbitrary selection of time criteria can be used to show whatever trend you want to highlight - particularly in hindsight. And if Buffett made this bet back in the go-go 1990's, he might have very well lost. It all depends on your start and end-dates for selection. It is akin to Disco Stu's record sales chart - ending in 1976. You pick the start point, you pick the end point, you can show a huge gain. Gold bugs did this all the time, however, lately you haven't heard much from them, as the commodity has stagnated.
Buffett's argument also tends to negate his own investment style. For the small investor, buying stocks is sort of a pig-in-a-poke. You buy 100 shares of a stock, you technically "own" a piece of the company. But you have no say in how it is run. You buy a 30% stake in the company, you might be on the Board of Directors, or indeed, the Chairman. And Buffett has done this sort of thing in the past - investing in companies he felt were undervalued at the time, and buying enough of the stock to have a say in how the company is run - forcing changes in management and policy and helping turn around the company and the share price.
It is akin to the difference between passively investing in a housing project through an REIT and buying an old house and fixing it up. In the latter scenario, you have control of what is to be done, and your talents and labor can significantly increase your yield. "Hands On" investing like that can generate real results.
Another example is the Darden Group - who until recently owned Red Lobster. An "activist" hedge fund, Starboard, bought into the company, forced out old management, and got a seat on the board. They spun off the failing Red Lobster chain (to an investment group, who having their own money in the game, will no doubt turn it around) and even spun off the real estate holdings into a separate entity. The results were positive. The share price went up, profits went up, and business improved. They saw, as outsiders, that people don't want cheap lobster slathered in fake butter, but upscale dining experiences like the Seasons 52 restaurant (part of the Darden group) which charges far more than Red Lobster ever did and has a line out the door. This is how capitalism is supposed to work. And "hands on" investing can make a real value difference.
But is it true that even the smartest Wall Street analyst will not outperform the market over longer periods of time? Well, in any quantum environment like a market, this is probably correct. Over time, you will make mistakes which will negate your so-called "smart" choices. And if you are a small investor who can't afford to take over a company, probably investing in an index fund - or a collection of stocks that represent a broad section of the market - is probably a smart choice. And as the story noted, monitoring the market on a day-to-day basis is pointless. Long-term gains are the real issue, not day-to-day fluctuations which are little more than background noise.
A lot of factors may affect stock prices in the short-term that have no affect for the long-term. Someone sells a chunk of stock in XYZ corporation because they need money (for example, a margin call) and the stock price tanks. In recent years, this has happened to some dot-com wunderkind who used their founder's shares as collateral for margin calls. Their bets on the market go South and their insider stock gets sold, which often violates some SEC rule or their terms of their stock options. This in turn tanks the share price, as people freak out that the founder of WilgroCo.com is "selling out".
Or whatever. The point is, share price fluctuations often have little to do with the real value of the stock. Volkswagen has a major crises with diesel emissions cheating, and the entire German car sector takes a beating - justified or not. It is not an indication of an actual change in value of the company, despite what the financial channels say (and they love to say how such-and-such a company "lose a billion dollars" in market cap, when in fact, it lost nothing whatsoever).
The good news is, I guess, that for the small investor, the best strategy to invest is to have no strategy other than to put most of your money into a mutual fund or index fund, or a number of mutual funds, and not try to strategize how to "beat the market" as it is likely you won't anyway. Diversify your portfolio and then just leave it alone.
The worse strategy is to try to have a strategy - to listen to financial channels day in and day out and buy and sell when the shouting guy says to. You will end up underperforming the market in most cases, as you churn your account, buy high, and sell low.