If there’s one industry that attracts an unusual number of snake oil salesmen, it’s probably this one.
Spending some time around markets eventually reveals the economist who knows what’s coming next, the fundie who has discovered a secret that somehow remains hidden from every other investor on the planet.
In most professions, expertise can be observed directly. We assume the surgeon knows more about surgery than we do and the pilot knows more about flying. Investing is different. It may be one of the few areas where a healthy dose of scepticism is necessary to succeed.
However, I do believe there are a handful of exceptions to this.
For me, Warren Buffett is one of them. But it’s not just due to his extraordinary track record.
It’s that he occupies a peculiar position in this industry. As one of the most successful practitioners of the game, he has spent decades telling people not to play it the same way he does.
Most financial figures are sellers of some description, whether it’s a newsletter, a new fund or at the very least, a world view. And before throwing stones from a glass house, I should acknowledge the irony here. My career exists within this very realm.
The point isn’t that selling ideas is inherently bad. It’s that authority is often derived from the ability to persuade people that you know something most don’t.
Buffett's authority stems from almost the opposite impulse.
How many Michelin-starred chefs would tell people they could make the same dish at home, for a fraction of the cost? There's an almost self-negating quality to Buffett's credibility.
Below are some of my favourite takes from him.
"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals."
Coming from one of history's most successful active investors, the statement borders on paradox.
In 2008 Buffett famously made a $1 million bet that an S&P 500 index fund would outperform most investment professional’s picks over a 10-year period. And indeed, he was right. Ted Seides, co-founder of Protégé Partners, accepted the challenge and handpicked five hedge funds he believed would outperform the S&P 500 over this period. The performance gap was certainly something.
This exercise wasn't intended to be an obituary for active management. Rather, it was an exercise in humility for an industry that has long projected an image of delivering superior returns through complex strategies, demanding higher fees.
“The goal of the non-professional should not be to pick winners – neither he nor his ‘helpers’ can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”
I believe the ‘helpers’ he refers to here are “those who profit from giving advice or effecting transactions”. I imagine many readers have successfully invested in individual companies for decades and have the results to show for it.
But no matter your persuasion, the ability to consistently identify winning stocks over decades is extremely difficult, even with professional help. The argument is ultimately about probability rather than possibility.
“The most important quality for an investor is temperament, not intellect.”
Buffett's point challenges the common perception that investing is primarily an intellectual exercise. It also echoes Peter Lynch's observation that the most important organ in investing is the stomach, not the brain.
Lacking a 'superior' intellect is not the barrier many make it out to be. Long-term success is often determined more by the ability to remain disciplined and stick to a sensible process through periods of uncertainty.
Every generation produces its own collection of gurus, visionaries and occasionally outright charlatans. However, the promise of exceptionalism always gives way to the decidedly unglamorous virtue of common sense.
Simonelle Mody
Also in this week's edition...
Rachael Rofe is back to discuss a win for testamentary trusts and deceased estates, as questions on death and divorce rollovers remain unresolved.
Average super balances are often a misleading benchmark. Shani Jayamanne examines her own retirement goal and why comparing averages may lull Aussies into a false sense of security.
Most people spend decades planning how to retire but fewer plan for what comes next. The Retirement Researcher proposes some aspects you might not have considered.
Russel Chesler from VanEck explains why the primary risk in small cap investing is hidden in plain sight.
SMSF investors remain concentrated in shares, cash and property. Nick Kelly argues there may be a missing piece.
Conventional investing wisdom tends to focus more on rules for accumulation. But what about the other side of the equation? Trevor Schmid shows why the buy-and-hold method has no landing gear.
Why have active managers struggled as passive investing has surged? Larry Swedroe examines the broader implications for investors.
Curated by Simonelle Mody and Leisa Bell
A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.
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