Man on Coin Stack

What we can learn from a Retiring Market Strategist

Man on Coin Stack

"Investing is an unusual profession: perhaps the only one where amateurs have a good shot at beating the pros."

--Gerard Minack, “Downunder Daily”

As proponents of the efficient-market hypothesis, we normally do not pay heed to stock analysts and market strategists, especially the ones from the big Wall Street firms. Today, however, we have to acknowledge one Gerard Minack of Morgan Stanley who just announced his retirement. In what could be perceived as a jab at his employer as well as the rest of the active management world, Minack cites the data from the Standard and Poor’s Index Versus Active Scorecard (see chart below), which details the failure of actively managed funds to beat their benchmarks.

If amateur investors can beat the majority of professional investors by simply indexing, Minack asks why the professionals are still in business. He answers his own question by noting, “The good news for the professionals is that many amateurs persist in trying to beat the market and, in aggregate, they seem to do a significantly worse job than the professionals.” Minack attributes the failures of active amateur investors to behavioral issues in general and performance-chasing in particular. To illustrate, Minack includes similar charts to the one below which shows how investors in a fund can lose money via poor timing of cash-flows, even when the fund had a positive return over the whole period.

Minack concludes, “In short, amateurs may be able to beat the investment professionals, but most do far worse. This keeps professional investors in business (and that keeps people like me employed, which is nice). But it means that returns to investors typically lag benchmark returns by a long margin.” The DALBAR study that we have tracked for many years graphically illustrates this point, as shown in the chart below:

IFA reminds investors that it is not their job to keep Wall Street analysts employed. To have the highest probability of beating the Wall Street professionals, the most sensible option for amateur investors is a portfolio of globally diversified index funds. To get started on building a portfolio that is right for you, please take the IFA Risk Capacity Survey.