At the 1896 Olympic Games in Athens, a certain Robert Garrett competed in the shot put. He paid for the trip to Athens out of his own pocket. Once there, he tried his hand at the discus too, just for fun. His first two throws were clumsy. Instead of flying elegantly, the discus spun out of control and nearly hit the crowd. His competitors laughed. His third attempt, however, went better, and Garrett even won the event.
The story sounds unbelievable. Today it would be unthinkable for an untrained athlete to win gold at the Olympic Games. Professional athletes are equipped with gear that's computer-calculated and perfected in wind tunnels, and their training programmes and nutrition are optimised down to the last detail. Without the ideal body proportions they don't stand a chance, and even the stars of a discipline are often only hundredths of a second or millimetres ahead of the next competitor.
What does Robert Garrett have to do with the financial industry?
What does all this have to do with the discipline of investing? This discipline, too, has become tremendously professionalised over the past decades. Before the 1950s there wasn't a single hedge fund; today there are more than 10,000. In this segment alone, professionals manage a combined 3,200 billion US dollars, all of them competing with the aim of generating higher returns than their rivals. In 1980 there were around 15,000 CFAs; today there are about 150,000 (qualifying as a CFA, or Certified Financial Analyst, is regarded as the gold standard of the industry). This army of well-trained, ambitious and well-paid employees is working around the clock to analyse companies, test investment strategies and watch price movements in order to track down investment opportunities. And to give one more figure: currently only 10 percent of trading volume on the world's stock markets can be attributed to classic, fundamentally grounded investment decisions. Sixty percent of trading volume results from professional, computer-driven strategies. That share has more than doubled over the past ten years.
The professionalisation of investing has advanced so far that it has taken on at times absurd forms. A well-known example is a data connection between New York and Chicago: in 2012, a network specialist invested 300 million dollars to lay a fibre-optic cable running as straight as possible between the exchanges of these two cities. The sole purpose: to cut the speed of data transmission from 13.1 milliseconds to 12.98 milliseconds. The project was highly profitable. Because on the stock exchange, a lead of just a few milliseconds can be converted into millions of dollars. The current state of the art also includes combing through economic news in fractions of a second with the help of artificial intelligence to find trading signals, estimating Wal-Mart Stores' sales in advance using satellite images of car parks, or getting live information via Bloomberg on the position and route of every cargo ship in the world.
What does this mean for private investors? It strikes us as extremely implausible that a private investor or a bank adviser from the branch “around the corner” can keep up in this game among professionals, especially when the investment product in question comes with annual costs of over two percent of the invested volume. It makes far more sense to invest without forecasts. With this approach, which quirion has chosen, as little as possible is traded on the exchanges, so that costs are kept low. On top of that, forecast-free investors protect themselves from losing returns to investment professionals, because anyone who doesn't trade simply isn't available as a counterparty to the professionals' speculative deals.
Private investors often overestimate themselves
Private investors frequently overestimate their chances of keeping up with the professionals. In a recent survey, one in eight men asked said he could win a point against tennis pro Serena Williams. That this is almost always likely to be wishful thinking is shown by this video. Just as amusing to watch is how three professional footballers easily see off 100 child opponents and win.
Customers are often sold investment products along the lines of: “Your fund manager relies on cutting-edge technology; he can transmit data between Chicago and New York within an incredible 13.1 milliseconds. You should invest here.” What gets left out: other professionals need only 12.98 milliseconds. A fund manager who is, in absolute terms, extremely capable and well equipped has nonetheless quickly lost relative to his opponent. Absolute ability and ability relative to the peer group are easily confused, yet distinguishing between them is absolutely central to investing. It's one thing to use Serena Williams's skill to beat amateurs into the ground, quite literally. But it's a completely different thing to make money betting on a Wimbledon win by Serena Williams. With bets like that, over the long run at most the bookmaker wins.
On the financial market, the uselessness of absolute ability shows up in hard numbers: the vast majority of managed funds achieve worse returns over the long term than their benchmark. And here too, paradoxically and precisely because of the growing professionalisation, there's a rising tendency: in 2008 the rate was 79 percent, in 2012 it was 83 percent, and by 2018 it was already 87 percent. Anyone who looks at investment talent in relative rather than absolute terms can understand this trend: because the more inexperienced investors forgo speculative trading, the harder the time the remaining top professionals have competing against one another.
That's why there is more reason than ever for a forecast-free approach. Because not being able to lose in competition with others may be a bad quality in sport, but when it comes to investing your own assets, you couldn't wish for anything better.
Robert Garrett's surprising Olympic victory can be read about here.
The figures on the development of the hedge fund industry come from here.
Automated trading strategies were reported on here.
A report on the fibre-optic cable between Chicago and New York can be read here.
The outperformance figures for active managers can be found here, here and here (US figures were used, along with the average of the figures for large-cap, mid-cap and small-cap funds).
