In Search of Higher Returns
As investors seek higher investment returns to help achieve their financial goals, where should they look? Before searching for someone or a particular strategy or combination of strategies to meet your outperformance expectations, maybe the first question to ask is, can you outperform the stock market over time? Unfortunately, conventional wisdom suggests that outperforming the stock market is not possible as the majority of advisers or portfolio managers fail in their attempts. In fact, many wealth management firms would let you know before signing on that their goal is not to outperform the market.
Although conventional wisdom provides some convincing evidence that it is not possible to outperform the stock market, what can we make of those investors who have significantly outperformed the stock market over time? There are some famous investors who have managed to outperform the stock market but how do pundits explain these outliers? In the case of Warren Buffett, one popular website implies that Buffett might have been exceptionally lucky even though he has significantly outperformed the market since starting his career decades ago. Peter Lynch is another famous name whose success has been called into question. Here is what Investopedia had to say about Warren Buffett and Peter Lynch, and we quote, “Meaning no disrespect, Lynch and Buffett may have just been exceptionally lucky, even if they are financial whizzes. Highly regarded economists have shown that a portfolio of randomly chosen stocks can perform as well as a carefully assembled one.”
If investors are constantly bombarded with media reports suggesting that it is virtually impossible to outperform the market, then what does that imply about todays investment companies? It seems to suggest that most investment companies are no longer incentivized to make efforts to outperform the market and why should they? Investment companies charging fees to assist you with your investment portfolio can be more efficient and profitable by trying to do just as well as the market and no more. What that means for clients is that their investment portfolio will always underperform the market by the amount that they pay in management fees. Most clients are okay with this as they have been conditioned to believe that market outperformance is not possible. One of Florida’s largest investment advisors has about 10 billion dollars in assets under management and only employs 11 advisers who are essentially their sales staff. These advisers are not employed to pick stocks that are going to outperform the market but rather to generate more fee income by bringing in more clients which is what they should do. Charging 1% on 10 billion generates about 100 million dollars of revenue and that is efficient. Using basic asset allocation strategies and low-cost index funds is an excellent choice for the majority of investment companies. Why pick stocks and generate more research related costs, especially when most believe that market outperformance is not possible.
So, what about those investors who still believe that Warren Buffet, Peter Lynch, or Jim Simons were they more than lucky? Speaking of Jim Simons, how do you explain his 60 plus percent average return for the 30-year period ending in 2018? Was Simons also exceptionally lucky as Investopedia assumed about Buffett and Lynch? Probably not. For investors looking to achieve market beating returns, they must simply do their research and seek out partnerships with those organizations that are actually successful at outperforming the market over time. If you are interested in finding out more about our approach which has handily outperformed the market with a lower risk profile, then feel free to contact us.
