What caught my eye this week.
I have ruffled feathers before by remarking that in my – purely anecdotal, totally unscientific – experience, engineers make the worst stock pickers.
On reflection, perhaps the push back I got was fair. I should have included doctors too.
We could spend a lot of time debating why my observation about engineers and doctors is not very useful. For example, I know a lot of engineers, and there are an awful lot of doctors about.
Perhaps flautists make even worse stockpickers than engineers? Perhaps but they so rarely pipe up.
Luck looms large
Instead I want to point to a great post at Fortunes & Frictions.
The author Rubin Miller asks whether chess players make good investors. However the question is sneakily rhetorical because Miller – a minor chess whiz, incidentally – already knows there’s no reason why they should:
It’s easier for people who aren’t great chess players to be great investors. They don’t expect things to always work out perfectly.
Disruption of well-laid plans, and navigating the unexpected, are familiar. That’s how life works.
Whereas people who invest their time in a niche pursuit like chess, where perfect execution leads to ideal outcomes…have a potentially warped version of what drives success.
Chess players are familiar with wins and losses being honest feedback loops on the quality of their strategy and decisions.
But investing outcomes are often not helpful feedback loops, and completely unhelpful in the short-term. There is too much noise.
The post makes a compelling argument that luck looms too large in some pursuits – Scrabble, Backgammon, investing – for anyone to stay on top for long.
In chess, by contrast, the greatest winners keep winning.
That’s nothing like with investing. Just think of all those tumbling league tables and stories about the latest fallen investing guru.
Perhaps I’d argue that as you extend out the time horizon of investing, maybe the skill-signal becomes more apparent. (I say this, as most of you know, as a naughty active investor).
But in the short-term term investing is more like a game of Hungry Hungry Hippos.
And this is where the engineers and doctors go wrong, I suspect.
Engineers tend to think in terms of certainties, which is death to good investing.
Doctors do (rightly) have a capacity for fuzzier thinking, as anyone who has received a maddeningly vague prognosis on their lump, cough, or bump will know.
But their differential diagnosis rarely reverses back to first principles.
Perhaps medics also believe (thankfully) that they can fix things.
In contrast, good active investors can be more like the brutal backstreet butchers of yore. Real chop and chuck merchants.
Too good to be true
Coincidentally, Joe Wiggins at Behavioural Investment warned this week that consistent performance from a fund manager is actually a giant red flag.
After all, we know that the market is capricious.
We also know that different investing methods prosper under different regimes.
Given that, you should run for the hills if your fund manager posts market-beating returns year in, year out. In that case you probably don’t own a fund but a bit part in a Ponzi scheme.
Wiggins advises:
Fund investors should stop focusing on and thinking about consistent excess returns – it tells us nothing meaningful – and instead concentrate on consistency of philosophy and process.
In a complex, unpredictable system that is all that can be controlled.
(Incidentally, in case anyone cites Renaissance Technologies’ infamous Medallion fund as a consistent performer I’d say (a) fair and (b) to me ultra-high frequency trading looks more like financial systems plumbing if you’re generous and rent extraction if you’re more cynical. Either way it’s not really active investing as we’re discussing it here).
Thrills and skills
An alternative piece of advice to Wiggins’ for active fund managers – or those who would try their hand at stock-picking – is the one we’ve espoused for years.
Don’t bother.
The chances you will turn out to be even a legitimately inconsistent market-beating stockpicker are slim. It will be years before you have a sense of whether any gains you make are due to luck or skill.
And as Jack Raines at Young Money pointed out this week, you could have been doing something more predictable with your time and effort instead of signing up to an existential crisis:
Investing is one of the few fields where an inexperienced novice often has an advantage over an ‘expert’.
You can spend 1,000 hours honing your skill, studying markets, and backtesting your strategies. Then market conditions change, and you underperform anyway. Your 1,000 hours of knowledge may even be a disadvantage, if your trading strategy was reliant on a specific asset class or market environment.
Meanwhile, if you spend a year learning French, the language won’t change overnight. If you become proficient in Python, you won’t wake up one day unable to code. If you write a blog, you won’t suddenly become illiterate.
You can quickly tell if your French, Python, or writing is improving.
With trading? Maybe you’re good, maybe you’re lucky. It’s hard to tell, and you won’t know for a long time.
To his credit Jack seems to have gone through the investor hero’s journey – from meme stock chaser to tracker fund investor – in about 18 months of blog posting.
Whereas 15 years on I’m still stuck on third base…
Was it worth it?
My friend Lars Kroijer ribbed me about this years ago.
Spending a lot of time researching and picking stocks made sense if you were paid to manage other people’s money, he said. You took a small percentage of a huge number as your reward.
But I wasn’t rich enough for even 10% outperformance on my nest egg to beat simply earning more from a career or starting a business. So why not just invest in a tracker fund and do something else more profitable instead?
Why not indeed?
Because active investing had become a passion and a game long before I knew enough about it to understand any of this.
Perhaps you’re the same. If you’re going to do it, you’re going to do it, right?
Even though most of us know we shouldn’t – and many of you reading this sensibly don’t!
Have a great weekend all, and enjoy the links below.
From Monevator
Confession: I used to juggle multiple bank accounts to score the highest savings rates – Monevator
Paying for social care using your investments – Monevator
From the archive-ator: Sticking to your financial goals when the funk comes to visit – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
UK consumer confidence even lower than in the 2008 financial crisis – Guardian
Retail sales fall as the cost of living crisis bites – BBC
Distance from London leads list of house price determinants, study finds – ThisIsMoney
FCA flags concerns over challenger banks’ financial crime defences [Search result] – FT
Simplifying retirement income planning using the ‘spending risk curve’ [Nerdy] – Kitces
Products and services
Energy-saving criteria high on UK homebuyer checklists – Guardian
Retirement village life: your own Thursday Murder Club? [Search result] – FT
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Will getting a water meter save you money? – Be Clever With Your Cash
Don’t delay if you’re looking for a cheap mortgage – Guardian
The pros and cons of [actively-managed] one-stop multi-asset funds in retirement – ThisIsMoney
Homes with roof terraces and balconies, in pictures – Guardian
Comment and opinion
Q&A with author of The Bogle Effect, a new bio of Vanguard’s founder – Abnormal Returns
Why is active management so difficult? – Advisor Perspectives
Learned from the best – Humble Dollar
When cash is king – Compound Advisors
Zeroing in on your workplace pension returns – Banker on FIRE
So, interest rates are going to rise – Klement on Investing
North star – Indeedably
Sorry, collectibles are a terrible investment – Full Stack Economics
Portfolio pain isn’t a four letter word – A Teachable Moment
Mortality beliefs and savings decisions [Research, PDF] – SSRN
Crypt o’ crypto
Is cryptocurrency really a portfolio diversifier? – Morningstar
Naughty corner: Active antics
Three things to learn from Bill Ackman’s brilliant Netflix trade – MoneyWeek
Unpacking Elon Musk’s Twitter play… – Musings on Markets
…and back to the future of Twitter – Stratechery
The investment case for energy stocks over ESG – Freedom Day Solutions
Value factor comes back – Two Centuries Investments
Kindle book bargains
Shackleton’s Way: Leadership Lessons from the Antarctic Explorer by Margot Morrell – £0.99 on Kindle
Hillbilly Elegy by J.D. Vance – £0.99 on Kindle
Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle
The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle
Environmental factors
“As a scientist, I’m reconsidering having kids and I’m not the only one” – Guardian
ESG: do other risk factors explain returns? – The Evidence-based Investor
An ocean of noise: how sonic pollution harms marine life – Guardian
Off our beat
The end of sick days: has WFH made it harder to take time off? [Search result] – FT
Could viruses cause Alzheimer’s? Covid-19 studies offer new clues – National Geographic
Home ownership changes you – The Atlantic
Debating at the Oxford Union created today’s political class – Guardian
How Birds Aren’t Real took on the conspiracy theorists – Guardian
Young people are lonelier than ever – Vice
How My Big Fat Greek Wedding became the highest-grossing rom-com of all-time – The Ringer
And finally…
“Spending money to show people how much money you have is the fastest way to have less money.”
― Morgan Housel, The Psychology of Money
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Have to say I completely disagree. I’ve found during my career it’s those with an arts/humanities/social science background that are totally unable to think in probabilistic terms. Who cannot visualize volatility distributions, skew and kurtosis. In fact, I find the vast majority of people think in almost completely modal terms. They have a base case and very little else. They have strong conviction for no good reason.
I spoke yesterday to a classic example of this. An ex Federal Reserve, PhD economist, now head of an investment bank economics dept who told me that there was basically zero probability that the central bank of a certain emerging market would cut interest rates in 2023 or 2024. He’s an example of most social scientists: good historians but utterly useless at forecasting. So I presented to him his forecast from last year where he thought the probability they would hike rates was basically zero. The’ve hiked 500bp in the last 9 months. Completely wrong again yet he still can’t stop thinking modally.
Also stock picking is active but the plethora of strategies at RenTech isn’t? What about yield curve trading, volatility trading etc. If I take a yield curve view, how is that different from being long one stock and short another other. RenTech does that and it’s not especially high frequency. Your definition of active investing seems totally arbitrary.
I think the point about potential return of investment in terms of free time allocated re: active investment is a good one. I prize my free time very highly as once spent, you are done with it. It has to be fun, simulating etc or essential like brushing my teeth – and given I have enough money to do what I want, spending time on admin (which is what active investing feels like for me) for a less than average return doesn’t make the grade for me. I’d rather keep plodding along with my investments on autopilot – and spend my free time on something more meaningful like gazing out of the window and watch the bluetits in my garden raise some chicks.
Generalising by profession is perhaps no less a prejudice than generalising by any other population demographic.
The counter-statement makes more sense – i.e. that being mathematically or scientifically trained is not necessarily of benefit in the ‘art’? of stock-picking?
But then having no mathematical ability, or statistics skills, would surely be of detriment?
Or is your final argument that the medium to long term outcome of active investing is essentially random and unpredictable to any degree?
I can’t get around financial times paywall anymore via google search ☹️. Unsure if this is just me? Found an alternative link for the retirement homes article for those also seeking it: https://vigourtimes.com/retirement-village-life-your-own-thursday-murder-club/
@Bigpat:
Archive the paywall blocked URL using:
https://archive.ph/ and you will have access to the full text.
Here the one on sick days:
https://archive.ph/ZjpgO
Here the one on retirement villages:
https://archive.ph/19o7U
@ZXSpectrum48k — Morning and cheers for your thoughts! 🙂 Well as I tried to caveat with my language, this article was a little tongue in cheek. However I definitely have noticed a tendency, whether it actually exists or I just saw it through some kind of observation bias.
Perhaps a big difference between our data sets is I’m mostly talking about private investors, and you’re citing professional investors? I’m sure a subset of engineers who do think more probabilistically would make good investors, perhaps even the best investors.
It’s also pretty likely that something else could be going on too. For instance maybe older engineers and doctors (these were mainly older vocal types, invariably male) like to communicate loudly and confidently about the certainty of their investing ideas, versus those from other fields who for whatever reason are more circumspect.
That is, my observation is more fallout from a communication style / confidence than a reflection of investing skill? It is after all just anecdotal.
My education was science/engineering, by they way. 🙂
As for Renaissance, from memory it’s only the Medallion fund that put up the 40%-50% a year bonkers consistent returns. The others swing about a bit more IIRC.
I agree that what I was calling active investing for the purposes of this article was arbitrary (basically stock picking and clunky asset allocation / market timing) as it related to my comments about engineers.
But on another day I would be up for continuing the discussion about where active investing ends and ‘something else’ begins. Everything is active investing, as you know, if you squint hard enough. (E.g. A tracker fund that follows the curated S&P index and makes decisions about what to include at the margin).
And I do think a strategy that depends on your hardware being a few nano-seconds closer to an exchange so its algorithm can try to be first to exploit millions of times a day some tiny discrepancy in a dataset for a incremental win at least 51% of the time is doing something different from Bill Ackman saying he no longer has the confidence to have a stab at the value of Netflix in three years time so he’s selling 10% of his fund.
I agree they are both exploiting perceived market inefficiencies, and they’re both probably contributing to it being more efficient, so they’re part of the market plumbing/ecosystem. But — in the context of this article — I think that’s a bit like saying a nitrosomonas bacterium and a baleen whale are both ‘eating’. 😉
@BigPat @Squirrel — Interesting hack, I will have to explore. The Search result still works for me. (I actually have an FT subscription and would encourage others to get one for the quality of the journalism etc! But I try to check these links in different browsers).
@Jon — Well I think we can generalize without it being prejudicial. 🙂 Data scientists etc do this all the time, as indeed to people about a host of things in their everyday life. As for your other comments, I’d have a read of the F&F piece. He really does a good job at pointing out the difference between skill versus luck at the very highest, broadest level, and its implications. (He doesn’t say anything about engineers — that was me — and neither of us said anything about maths. I agree some ability is necessary, but for the stock picking I’m arbitrarily talking about in this piece I’d argue even A-Level maths might not be needed provided the investor has internalized rate-of-change etc through some other source than calculus!)
Finally, I don’t believe active investing is in the pure sense random and unpredictable. Personally, I think it’s very possible skill and persistent outperformance exists. However when you drill down into it you can start to make a case that even say Warren Buffett would have seen different results if he’d been 30 years earlier/later or in another country (basically another investing ‘regime’). You’d thus want to test out Buffett over several investing lifetimes in several different worlds. Unfortunately biology prevents us doing that with Buffett (it doesn’t prevent an investing model/black box from doing it, however, which is why investing is rightly full of quants these days.)
Most people might as well act like any long-term outperformance from active investing isn’t something they will enjoy, though, that’s clear from the statistics. Even if it definitely does exist, it’s clear that (at least after fees) a majority of people don’t get it.
@G — Very wise. I might do the same if I knew what I know now when I was 30… (And I say that as someone who has been beating my benchmarks at least since I’ve been tracking against them (about 2013) although another six months like the last six months could see that record join all the others in circling the pan… 😉 )
Thanks @squirrel. That trick with the archive link seems to work a treat.
Ref sick days, when I had Covid recently, although I wasn’t ‘expected’ to work, I did anyway. I left my status as offline so no one would call me or try to chat with me, blocked out my calendar and just dealt with ‘urgent’ stuff in my inbox, having naps when I felt too exhausted. In hindsight, I should have not logged on at all but I didn’t want to get behind on my work.
Obviously, had I still been fully office based, it would have been a week off work, I never used to take my laptop home pre-Covid.
I don’t know enough engineer-investors to work out whether they do better or worse than average. But I do know a few doctors, and can see there are contradictory influences possible.
Modern medicine is practised as far as possible with reference to an evidence base, the outcome of clinical trials on whether a medication or procedure is effective (and we all know quite a lot about trials now because of their profile in the identification of effective Covid vaccines). But at another level the evidence is always messy, a patient rarely corresponds exactly to the typical person in the trial – simply because of all the permutations of age, sex, ethnicity, individual medical history, etc – and a choice has to be made. Very often an individual doctor will be strongly influenced in how to make that choice by advice from acknowledged experts.
So a doctor who looks at the investment evidence base may choose a different personal approach from another doctor who because of the messy data on investments prefers to make their choices based on the expertise of some supposed financial guru. Which of those is more representative of the profession?
Fair enough, @TI.
Though I do know a little bit about data science, as I have a Masters degree in it.
*along with a medical degree, and a PhD in neuroscience.
@Jon – Haha, touché! 🙂
It’s perhaps more helpful to think in terms of personality traits rather than occupation which is secondary to the former. For example, engineers are generally more interested in ‘things’ than ‘people’ and you have to be very interested in ‘things’ to become an engineer (i.e. sit at the far end of a distribution curve).
People don’t like it (including myself) but evidence for the Big Five personality traits is very hard to ignore. Most the criticism relates to it not explaining enough (but something is better than nothing) or it not having a theoretical basis (we can’t explain why these might exist).
You’d have to ask which of the Big Five traits are predictive for investment success and then see how these map to occupation choices. I haven’t done a thorough search but a link below to some recent research where ‘conscientiousness’ is positively correlated to net worth.
https://en.wikipedia.org/wiki/Big_Five_personality_traits
https://www.financialplanningassociation.org/article/journal/OCT21-ocean-how-does-personality-predict-financial-success
@TI. Medallion doesn’t just make money from HFT. It has a wide variety of strategies over a wide number of timescales.
I see your attitude from many “fundamental” investors, whether stock pickers or macro. It comes from a perception that somehow what they do is “active investing and risk taking” but what I do (or people like me) is somehow “arbitrage” etc.
I tend to think that most of this stems from them looking at our risk-adjusted returns and believing we must be in some way cheating. “How is it possible that ZX hasn’t had a down month since May 19, has a Sharpe of 6 or has never lost money in 18 years. He clearly can’t be actively investing. It must be arbitrage/cheating”.
Yet I only make money on 60% of days, so lose 40% of the time. Doesn’t sound like arbitrage! Why is being lent 1y1y/paid 2y1y/lent 3y1y any different from being short Netflix and Zoom and long Amazon? Moreover, the fund I work at has 200+ PM teams, $200bn+ of capital, and has generated returns of around $15% post fees (so over 20% gross) for 33 years now with only 1 down year (-3%) and a net Sharpe of 3 (so gross Sharpe of 4+). So it’s not just me. It’s very broad based.
The reality is that we are actively investing, we are taking risk. It’s just that we’re not taking views on “fundamentals”. We taking views on payout ratios. For me the yield curve is just a time dependent probability density function. It has certain modes of oscillation, certain harmonics, but given that right stimuli those modes can violently change. It’s predictable and it’s about capturing those phase transitions. It’s not HFT. I trade far far less than you!
We’re also not solely operating in risk-neutral markets like equities where everyone is trying to make active returns, and thus all netting off. We have far bigger markets, more liquid, but with more segmentation and more non-economic agents. How are my FX colleagues making such consistently good returns in an incredibly deep, liquid, “efficient” market. It’s not by taking fundamental views. It’s not arbitrage either. Their success rate is 50% but their payout ratio on up days is 3x their loss on down days.
I’d echo some of the comments above. I would not consider an engineer who did not acknowledge and understand uncertainty as being competent.
Perhaps the point is that engineers have a stronger tendency (or training) to develop a mechanistic understanding of a process and can adhere to such models too strongly. Problems in engineering often occur when conceptual error unknowingly dominates over “random scatter”, often as one pushes into the tails of otherwise well behaved distributions. Unknown unknowns as Mr Rumsfeld might call them, or black swans maybe.
Indeed!
Cognitive biases affect us all.
Particularly hindsight bias and confirmation bias in the world of markets..
@ZXSpectrum48K @all — This is a really interesting discussion, and I wish I had more time this weekend to get into it. (Sadly I’ve had to leave my guests in the garden to pop in to moderate these comments!)
Re: Medallion, HFT, arbitrage etc, well I’m not really disagreeing as much as our back and forth might imply – I explicitly said in my original article “fair” to anyone who pointed to the Medallion fund! 🙂 — and as I’ve said earlier I’m arbitrarily definining active investing as fundamental stockpicking mostly because the people I was making comments about were stock picking! 🙂
I don’t have a view about whether engineers and doctors make great quants because my everyday experience of professional quants is extremely limited. (I have a good friend who made money for years running a DIY bot on BetFair etc and he is a Cambridge engineer, but he left financial services over a decade ago to do so…)
I take your point about risk-taking versus risk-less arbitrage.
It’s hard for me to say anything sensible about the success/otherwise of your colleagues and whatever they’re up to because (a) I’ve only layperson knowledge of the area and (b) you have access to all the data and I don’t. However from everything I’ve read, we don’t live in a world where quantitative funds as a class are (anymore?) routinely posting market-beating returns after fees. We live in a world where some do, most famously the MF. Your group sounds like another, even more so after risk-adjusting which I recall you explaining several times is a reason why you feel some ‘takes’ on hedge fund alpha vanishing in the past 10-15 years miss the mark. But this isn’t really going to change my perspective of the practice of (whatever flavour of) active investing as a whole, which has to be based on what I read and see commented upon in the public domain. 🙂
@Simon @others — Just briefly, it’s worth thinking about what a ‘bad’ stockpicker is. A great stockpicker is right only about 60% of the time, it’s said. Maybe we could say ‘average’ is less than 45% (given most lag significantly to the market, though of course the actual composition of the trades and returns depends on myriad execution factors) and perhaps ‘bad’ is under 40%. I am totally pulling these figures out of the air, for the purposes of making a point.
Actual outcomes down to ‘skill’ will be hugely obscured by the luck factor, as discussed in my post.
Given the above, there’s isn’t like an order of magnitude in my view between ‘great’ stockpicker and a particular flavour of ‘bad’ stockpicker. Often these guys I’m thinking about know the companies they opine about very well. Far better than me. They talk to management. They read trade journal stories. They believe they’ve developed a long-term perspective that the market has missed. They are very persuasive.
What they almost never say is “of course I could be wrong” except, maybe, at the end of an hour’s long argument. They understand probability and bad outcomes; they seem to believe they’ve eliminated it.
The first thing I think when I buy a position is that I could be wrong. Before I buy in fact — it determines my position size etc.
This doesn’t make me a great investor, conversely. But in at least one very important way, I’m not bad like they are.
p.s. Okay, I really have to go back out to the garden and stay out but just thinking about it some more, maybe the issue with engineers and doctors is these are professions that put an *extremely* high premium on being right.
Even, say, a chemist will say they learned something useful from failed experiment.
Nobody wants to hear what an engineer learned if their bridge fell down or their circuit melted. Or, in the case of doctors, if a relative died.
In contrast there are many professions where one can be wrong every day and it do nothing to your reputation. It might even be just a cost of doing business! (e.g. journalist or lawyer).
In the defense of engineer/doctor investors, maybe their public pronouncements have been honed by this requirement more than their underlying investing thesis actually reflects. (I can’t say I’ve seen that reflected, anecdotally, in their returns however, but this certainly isn’t data).
I appreciate I’m focusing more on the profession then the personality traits some have suggested are more meaningful here. That’s where I’ve seen the correlation, but agreed maybe with a proper study it would not be causation.
If I may add a soupcon to the profession/propensity thoughts.
Having worked as an accountant in many different offices over many years, and having a layman’s interest in psychology, it became increasingly obvious to me that my male finance colleagues noticeably tended to have more daughters than sons.
My theory is that numerate males tend to choose “numerate” females, who by disposition are more calendar conscious, and who thus are more accurate in their timings, and that timing influences the resulting gender.
By way of contrast, a Wiki search that I once did showed, in a list, that across a swathe of countries not one of them reported more female than male births, and that only a miniscule fraction reported equality.
P.S. Can anyone advise how to type a cedilla etc on Windows 10 on an HP laptop with N.B. no number pad, my trusty Toshiba having finally expired? Google answers don’t seem to work.
@Factor – this might help:
https://howtotypeanything.com/type-c-with-cedilla/
Not sure about your gender hypothesis though 🙂
@ Brod
Thanks, but the basic method in the link says “….. using the numeric key pad …..”, which as I said my HP Pavilion doesn’t have.
I did try the copy and paste hack but as you can ÇÇÇ I only managed upper case. With other things to do, I gave up for today.
@Factor
On a Windows computer, there is a program called the Character Map (type that into the Windows search). You should find a lower case c with a cedilla (ç) in there if you scroll far enough, at which point you can select and copy it.
@Factor On Windows 10, you can use Emoji input to insert Unicode characters. To invoke Emoji input, press Windows + “.”(full stop)
The resulting pop-up has 3 tabs – the last one, with an Omega character(Ω) leads to characters from non English alphabets.
I wonder if there is an interest-rate and regulatory dimension to the discussion on active management between @ZXSpectrum48K and @The Investor. Some people, including private investors, companies and funds, can take large / focussed risks and get significant pay-offs, with regular double-digit year on year growth. They do so every day as ZXSpectrum says. But they are simply not offering what they do as a service to ordinary consumers. They already have the capital they need, or can borrow it at (say) 2% and do not need to go to retail investors. Years ago a City veteran told me he could see that most of the innovation, tough decisions and (therefore) money is no longer being made by listed corporates, but e.g. by private equity. If you are able to deliver alpha, it is usually only at limited scale – giant funds just cannot move quickly enough. And if you can do that, why today go through the regulatory pain to make your skill available to millions of private investors? By definition if you are in a highly-controlled and regulated fund that is obliged to hold listed, immediately liquid assets you have to do a similar job and have similar allocations, processes, compliance etc as your competitors, and produce detailed data and be accountable quarter to quarter. The huge regulatory costs on retail funds incentivise everyone involved to be conventionally wrong, not unconventionally right. And so a portfolio mainly made of trackers has to be best for retail investors, to capture what is ‘conventional’ at the lowest cost. If regulation loosens, and interest rates go up significantly, you would expect managers to want /need to look for capital more widely, and that might allow (some) active managers in the retail space to prosper again versus passive alternatives.
I love this website but this post strikes me as using lazy metaphors about chess written by someone who probably knows the rules but little more. This quote in particular grated:
“It’s easier for people who aren’t great chess players to be great investors. They don’t expect things to always work out perfectly. Disruption of well-laid plans, and navigating the unexpected, are familiar. That’s how life works. […] chess [players], where perfect execution leads to ideal outcomes…have a potentially warped version of what drives success.”
Strong chess players do NOT expect things to work out perfectly with ideal outcomes and the vast majority of games involve navigating unfamiliar territory. Top level chess is all about managing your resources while seeking to create imbalances that favour you, and then trying to exploit them before your opponent pokes a hole in your own defences. There is no such thing as “perfect execution” in chess, all chess players make many blunders, even at the very highest level.
My view: I don’t think chess helps (or hinders) investment skill because it’s such a totally different activity. Apples and oranges!
@Ben — Did you read the article? He was literally a junior chess champion and (from memory, I’m on the move) on the cusp of the top 100 players in the world at a young age.
@Factor – no chance the laptop has a function key combination that enables an numeric keypad in the UIO, JKL part of the keyboard?
@ relevant responders
Thanks vm for the suggestions. I’m deep into something else atm but I will get back to the possible workarounds anon.
@TI, Interesting discussion, not sure it stacks up with my own random anecdotal sampling of engineering investors, who are mostly risk averse and prefer indexing or funds! – at least in the UK. But I can see the general ‘what makes a good stock picking investor’ points you are making and how engineering design in general is more about dealing with known variables, stats and closed systems. Saying that, the richest man and engineer on the planet seems to do OK, even if he is a bit of a prat;)
Interesting article – probably won’t find many lawyers with a love of active investing as their firms’ compliance rules likely stop them from doing so. As a law firm employee (but not a lawyer) caught by said rules, it has probably saved me a world of pain and poor decisions so index funds it is!
@TheAustrian. A difference is the nature of the market players. In equities, everyone is an investor. In my area – interest rate swaps say – there are speculators like myself but also there are asset managers hedging duration risk, banks hedging mortgage portfolios, corporates hedging interest rate risk. Not everyone’s definition of success is a positive return. For many it’s simply to reduce risk cheaply. Moreover, there are barriers to entry, regulation etc. It all creates segmentation.
@TI. I’m not trying to argue active investing is good or bad. For most, active investing is a bad idea. Everybody has known for at least 25 years that active equity investing has an information ratio (IR) of zero. I’m not quite sure why people are still making a big deal of that.
As an aside though it’s not true that there are no aggregate positive returns from active investing in some markets. FX overlay funds have been generating positive IRs (net of fees) for decades. There is literature to show this. Not huge IR but measurable. Even broad hedge funds produce positive net active returns. It’s pretty clear when you look at the actual numbers (see https://easyupload.io/bgxitl) but bother to weight it correctly via volatility rather than cash . Sharpe’s Arithmetic of Active Returns had more holes in it that a piece of Swiss cheese. Nice toy model, ok approximation but not reality.
I think my biggest beef is your implication that you are only actively investing is just about stock picking or something else fundamental. Your personal bias for that makes you see it as somehow better.
Plus I cannot get around the idea that you really believe that someone with an economics or history background would be better at trading than the mathematician, physicist, data scientist etc. One of my key hiring rules for juniors is to only consider those with precisely no interest or knowledge about finance, markets or business. They should just want the money. I don’t want people with pre-existing views on how markets work. I just want them to take the data, run the numbers, play the payout ratio and repeat and rinse. No views or emotional ties to positions. That’s the problem with those with a background in social sciences – they might be smart but think they know something. Better to be hire someone smart who knows he/she doesn’t know anything.