Worse Than a Coin Toss
If you are an investor that likes to follow financial market pundits, it is best to know their odds of being right. Studies show that in aggregate, financial pundits get it right a little less than 50 percent of the time. At the end of the day, most pundit predictions are likely wrong and should be taken with a grain of salt. Unfortunately, many investment strategies, specifically top-down investment approaches, are based on someone’s ability to predict future market direction. But with odds worse than a coin toss, top-down strategies are almost doomed for failure. So, why do investors continue to listen? Investment strategies that sound complicated seem more impressive than those that sound simple. If you couple that with the salesmanship and marketing muscle of larger organizations or well-known pundits, you can attract money and investors.
Talking loudly and saying nothing is usually the end result of investment strategies that rely heavily on financial pundit predictions involving market direction. Hedge funds are well known for hiring some of the best and the brightest investment professionals but how have they performed relative to the S&P 500 over time? Recall Warren Buffett’s bet with a financial pundit who wagered one million dollars that he could pick at least 5 hedge funds that would beat the S&P 500 over a period of 10 years? After that 10-year period that ended in December of 2017, Mr. Buffett was one million dollars richer. From January 2008 through December of 2017, a $100,000 investment at the beginning of 2008 in the S&P 500 would have more than doubled to about $225,586 at the end of the last year, compared to only about $148,000 invested in the average hedge fund.
Investor memory is indeed short as many popular investment companies simply place client monies in stocks held by the most popular hedge funds. To be fair, there are hedge funds with good histories over the last five years or more, but investors need to do their homework to find those with effective strategies. Unfortunately, the average retail investor will not qualify for hedge fund investments. Investors that simply mimic a hedge fund by copying their stock picks are even more likely to underperform the market than Buffet demonstrated. This is because of high fees and the fact that by the time larger hedge fund managers report their holdings they might no longer own many of the stocks that were mimicked.
Whether you are looking for more diversification among styles or simply want to outperform the stock market over time, it requires effort to build or find those market beating strategies. Fortunately, at Investoristics, we have a simple and effective strategy that produces excellent results versus any index in any market environment. Our strategy significantly outperforms the market over time with lower risk. Our approach offers outstanding down-side protection and is easy to implement with more than ample liquidity. Retail investors can benefit by subscribing to our portfolio management newsletter while investment companies or insurance companies are welcomed to discuss more tailored solutions. Please feel free to find out more about our portfolio construction process by contacting us via our website.
