Stop Your Delusion – You Can’t Beat The Market and You are Wasting Your Precious Time Trying

In my last post, I wrote about the things that I learned and relearned by investing in MoviePass and HMNY.  Believe it or not, HMNY is not the worst investment I have ever made, at least not yet.  I have actually owned stock in two other companies that lost 100% of their value.  Washington Mutual was one, and XO communications was the other company, both went Bankrupt because of bad management and risky bets that did not pay off.  Yes, I should have learned my lesson fully with those two terrible stocks, and in fact, I had learned my lesson but unfortunately, I fell back into a bad habit of using the wrong parts of my brain (which are always functioning whether you like it or not) to make my investment decisions.  Luckily, I had previously experienced enough pain with those prior decisions to limit my portfolio exposure to HMNY.  I only wish I would have not wasted any time or money investing in HMNY at all.   The ONLY good thing that has come from investing in HMNY has been the reaffirmation that it is totally foolish and delusion to try and beat the market.  Again, this is something I inherently already know, both from hours and hours of studying investing and from my own experience over 35 years plus of investing.

There is a saying that I have seen around that goes something like this.  If you could beat the very smartest students on a test 99.5% of the time, by doing essentially no studying and putting in almost zero effort or preparation but simply follow a simple prescribed method of filling out a test, VS. studying for hours and hours, fretting over every decision on what you study and if you were considering the right factors; only to be almost certain you would not beat the average benchmark, what would you do?   The answer is obvious, you would take the path of least resistance, you apply the obvious known prescribed method to score in the 99.5% percentile of returns.   In investing, it is so obvious that our miswired silly human brains almost refuse to acknowledge it.

WAMU, as it was called, was a very big company, with almost 50,000 employees and around $40 Billion dollars of assets under management.   Because I lived in Washington, I could see first hand how big and successful WAMU appeared to be, they had branches all across the state, and eventually grew all over the West Coast.   They were a beacon of strength and stability, or so people thought.   When 2008 rolled around, it became evident that WAMU had taken on way too much subprime business, their assets were seized by banking authorities, a bunch of their assets were sold off in a fire sale, and the Feds sold the rest of the business to JP Morgan Chase for a huge discount.  Stockholders of WM were totally wiped out via a Chapter 11 bankruptcy filing.

For the sake of brevity, I won’t go into detail on what happened with XO Communications.   Basically, that was a riskier tech/communications stock that was similar to HMNY in that it had very dishonest management, it cleaned out stockholders, filed Chapter 11, got reorganized giving the dishonest and terrible management fat pay packages after totally ruining the company.  It was a sham, and it was many years ago now.   But you remember the really bad ones like HMNY, XOXO, and WM.   They hurt, and they should hurt.  As Warren Buffet says, the first rule is “Never Lose Money”.   And as easy as that sounds, when you are picking individual stocks, it is surprisingly easy to lose money, permanently and forever.

The good news is, that there is really no good reason at all to own individual stocks.   In truth, it is a terrible mistake for almost all investors to even try and pick stocks.   It is as the title of my post suggests, delusional to believe that you as an individual investor will beat the market averages.   But you definitely should not feel bad about that. Professionals also can’t beat the market.  It has been proven over and over again, for decades now, that fewer than 1% of professional traders beat the market.  And when they do beat the market, it is usually by a very small amount 1-2%.   There is literally reams and reams of studies and data that prove that Mutual Funds, Hedge Funds, Private Equity Funds and any other type of fund you wish to call into question simply cannot beat the market over a long period of time.  One of my favorite articles on this topic is from Julie Segal from the Institutional Investor, “Beating the Market Has Become Nearly Impossible”  It is worth a read if you insist on insisting that you can deliver better returns than the market.    In particular, I like that the article discusses some of the reasons that institutions keep trying to beat the market.   The article also has some links to academic studies that prove with data that professionals simply can’t beat the market.   It is a fact, people who are very smart, who have years of training and experience in the market, who spend their entire days working on finding unique opportunities to deliver market-beating returns – simply can’t beat the overall indexes.

What is the reason for this?  Well nobody knows for sure why.  But the simple answer is that markets tend to behave irrationally and humans tend to make bad decisions when faced with irrational markets.   It is as simple as humans tend to buy high and sell low.  But it is really more complicated than that.  There are all kinds of theories about the market and how it behaves, how information is disseminated, received and acted upon.  You can read book after to book on this subject.   I can save you the trouble here, all the factual based books come to the same conclusion.   You can’t beat the market, and it makes no difference how much you have studied them, how much experience you have, how many people you have working for you, or how smart you are.

Why do people with wealth keep trying to beat the market even when they know it is extremely unlikely?  That is an interesting question.  I have heard and read a lot of different reasons for this, and I will explore a few of them here.

One reason I often hear is that people with wealth tend to view themselves as somehow special.  After all, wealth has bought them privilege and luxury in almost every facet of their lives.   From private schools to luxury vacations, luxury cars, to the best doctors, to the best country clubs, wealthy people live a life of constant privilege.   From this experience, they have grown accustomed to “paying up” for the very best.  So when it comes to investing, most wealthy people simply believe that they need to “pay up” to get the best financial advisors and management.  For the wealthy, it is totally incongruent with the rest of their lifestyle to think that they could do something pedestrian like simply buying a low-cost Vanguard ETF to achieve performance that is on par or better than what they could receive from their high priced or “sophisticated” investment or wealth advisor.   It doesn’t matter if Warren Buffett himself advises personal investors to stick to low-cost by7 ETF funds.  The rich think that they can and should do better, even if all the evidence points in the other direction, they want to pay for the “best”.

Another common reason I hear about is that people with money like the “club-like” nature of investing with a wealth manager.  For high net individuals, many wealth management firms offer all kinds of special activities for customers who invest with their firms.   I have been to a few of these things over the years while being pitched to invest with various firms.   They offer things like nice dinner events, event tickets like sports or concerts, exclusive things like meeting local celebrities and such.   Some of the things are actually really cool and fun.  To me, it always felt like a very expensive way to buy friends.  Most firms charge around 1% of your total portfolio yearly.   That doesn’t sound too bad until you look at how much that will cost you over several years – most people agree that paying that kind of money to join a “club”  and to buy some friends is not worth it.   Trying to be open-minded about this, there may be some good networking opportunities in things like this, I never really found that to be the case, but I was not really in a position where networking with high net-worth people was super important to me or to my lifestyle.

A third reason that people choose to pay expensive financial advisors who don’t beat the market, is they both lack the confidence in themselves to manage their own money, and they prefer to be separated from that task.  Both to protect themselves from their own mistakes and to insulate themselves from any bad outcome that may happen, such as losing money or badly trailing the market.  It is easier to tell the significant other that the “guy or gal” we hired to manage our money sucks!  Than it is to tell them – hey I suck!  These are not necessarily bad reasons in my opinion.   However, there are good and bad ways, or better put, excessively expensive and fair priced ways to get this job done.  It makes zero sense to pay expensive fees to a salesperson, relationship manager, investment advisor, or whatever other bullshit titles these people put on their business cards.

If you really want or need help, pay fee-based certified financial planner for some time to help you understand how to efficiently allocate your portfolio.    If you want a firm that will do basically all the work of setting up a portfolio, rebalancing it, do loss harvesting in a tax-advantaged way, take a look at betterment, they charge only .25% and their results are consistently much better than any private client banking.   They have some good historical comparison data on their site that shows how much better they do.     I know a lot of really smart people who have done really well in their respective fields who simply have zero interest in managing their own money.  They just don’t want to deal with it for whatever reason.   I think that is fine, but just like buying a house or a car, or managing your healthcare, or any other major life decision you make.  You should at least get educated enough so you don’t get totally screwed over.   You wouldn’t buy a house without investigating the neighborhood, looking at comparable homes, getting an inspection and all the other things homebuyers do.   You certainly wouldn’t just hire a realtor and say, buy me whatever you think is best, and I will just live with it!    So don’t do that with your money either.  If you do, you are pretty much guaranteed a subpar return, and worst-case scenario, you could get totally burned by another Bernie Madoff like scandal.

Finally, there is the “I like the game” rationale for why people try to beat the market.  I fall into this category some, so does my father.  So I get this idea, it is part gambling, part skill,  part entertainment.  It is hard to blame any of us for wanting to play the game.   You only need to watch CNBC for a few hours to see what a bedazzling casino-like world investing can be.   Having worked in media for many years, the tricks CNBC uses to keep investors glued to the set and salivating for the next nibble are as old as the knowledge of not being able to beat the market.   CNBC is an exercise in eye candy, sensationalization, and the constant promise of continual changes that seem oh so important.   It is like crack to the personal investor/gambler.    I remember when CNBC for started out in 1989, yep I am that old and have been watching it from the start.   It was a totally different animal back then.  There was very little in terms of slick graphics, wild entertainment commentators like Jim Cramer had not really gotten started yet.   For most of the day they didn’t even run a ticker across the bottom of the screen.  (Take a look at the Inaugural broadcast, we have come a long way from 1989!)

Compare those early days of CNBC to what you see now.  It is a fined tuned machine for grabbing and holding your attention.  Not only do we have a constantly changing ticker running all day, we now have two of them stacked up at the bottom of the screen.  In addition, there is a constant barrage of fancy graphics zooming in and out of the screen, a charging bull! – A scary bear!  Instead of one or two anchors, most CNBC shows have 4-5 people at a roundtable, and if that is not enough, they are constantly bringing in guests from Wall St with their latest calls!   In the lower right-hand corner of the screen, you have the constant update of the Dow, the S&P 500 and the NASDAQ.  And if all that were not enough to put you into hyperstimulation mode, that graphic constantly flips over showing the 10YR bond, the dollar and some other crazy thing I can’t even remember.    My dear wife says it the best, turn that damn thing off it is stressing me out!   Personal investors who pick stocks live in this bizarre state of FOMO, (Fear of Missing Out).  Will I miss a critical piece of news on a stock I hold, will I miss out on an up and coming IPO, or a new opportunity?  Will the market make a turn right when I was not looking!!?    The game of investing is stressful and exhausting.  Along with being totally delusional and pointless.   One good piece of advice I have heard on dealing with the need to “play the game”.  Take a very small part of your portfolio to gamble with, maybe 1-3% of your total assets.  Set that aside in a different account for discipline.  Trade that account any way you see fit.  Compare your results against the results of the rest of your portfolio that is in low fee market-based ETF’s.  Do that for at least 10 years.  If you significantly beat the market-based approach, go apply for a job on Wall Street.   There is a 99.5% chance you won’t be changing your day job

Coming full circle, every single serious scholarly and professional data-driven study has proven that it is almost impossible to beat the market averages.  Hedge funds almost never beat the averages.  Highly paid wealth management firms do not beat the averages.  Day traders almost never beat the averages.   The industry and the media make a lot of money trying to convince you that you can beat the averages, but they all know that it is not true.   It is a lie you are told and marketed to so that they can make money.  CNBC, Fox Business News, Motley Fool, Seeking Alpha, the myriad of investment newsletters, they are all trying to make a buck off the industry.

Worst of all, trying to beat the market takes an incredible amount of your most precious asset!  Your time!  Further,  it can be extremely stressful so it is bad for your mental and physical health trying to beat the house.  So my very strong advice.  Stop being delusional.   Stop buying individual stocks.  Don’t lose money!  Make investing boring again.  Buy a basket of low-cost ETF’s from Vanguard, rebalance yearly to the exposure you desire, and never look back.  You will do very well, and you will perform better than 99.5% of your peers!  OH – and STOP with the delusion!