Summertime… time for a little golf competition.
Let’s suppose there is a worldwide competition open to 10 golfers that get the chance to play one hole. Based on the history of this competition, the winner usually scores a birdie, 1 or 2 people shoot par and the remaining 7 or 8 will score bogey or worse. The stakes for the winning golfer are huge … they will receive a lot of prize money, accolades and media exposure; in fact they are set for the rest of their life.
The golfers that do worse than par receive no accolades. In fact most are so embarrassed they don’t tell people about their score. Financially, they have to pay the prize money for the winning golfer, not only this year but sometimes years into the future as well. The worse the score, the more money they have to pay today and in the future.
Any golfer that scores par doesn’t win, but receives some prize money.
By the way, you don’t know who the competition is … it could be beginners, experienced golfers or even professionals. You also don’t know what course you are playing at or what the conditions will be like. Forget about a mini-putt with the windmill, think about British Open Links course with a gale force cross wind. You consider yourself a decent golfer and have a chance to enter this competition. What do you do?
Here is the catch, you also are given the option of not even playing. You can skip playing the hole, stay in the clubhouse and simply accept the score of par. Sound ridiculous?
Why would anyone engage in this competition with only a 10% chance of winning?
Why wouldn’t they take the option of not playing, accept par and therefore beat 70% to 80% of the competition?
The unfortunate point of this fantasy golf competition is that it is based on a true competition. It simulates the actual results of investors, professionals and non-professionals alike trying to beat the market over the long term.
Most people are conditioned to the narrative that a market return is just “average.”
If you actually look at the evidence, the market return does better than 70% to 80% of other alternatives in any one year. If you look out over longer periods time, like 3 to 5 years, this percentage increases to over 90%. Bettering 90% of the alternatives is hardly “average” in my books.
In the competition for investment returns, you have to remember one important thing. Any returns above the market are at the expense of someone else, i.e. your gain is someone else’s loss.
It only makes sense to ask whom you are competing against? It is estimated that institutions not individuals today do over 70% of all trades on the stock market. Put another way, you are trying to win against professionals, like “top ranked” money managers, pension funds, sovereign wealth funds, hedge funds, and high frequency traders using super-computer trading algorithms.
Let’s equate this to our golf competition. Consider that the 9 competing golfers are the top 9 ranked golfers in the world. Do you think you could beat them all? Sure this is possible, but the probability is extremely, extremely low.
What does this all mean for investors?
Think of the implications of accepting par or market returns …
You can now tune out the water cooler investment talk by the financial media, your friends, family, acquaintances or friendly neighborhood stockbroker.
You also don’t have to spend your valuable time on the typical active management activities like researching stocks, analyzing economic data, going to manager dog and pony shows … the list is endless.
You will have more time to do the things that are truly important to you like spending time with your family, going on vacation or even trying to lower that golf handicap!
So, here is a question.
How are you investing?
Are you and/or your advisor out there trying to beat the market?
Perhaps it is time to look at a different approach, one that is more consistent and reliable.