Investing is a profession undertaken by many brilliant, highly educated, highly experienced people who work in fancy office towers and wear fancy clothes and use fancy mathematical formulas that seem beyond the average person. But investing is also done by rank amateurs with no experience or education who sometimes say things like “to the moon!” and “diamond hands” and who all too often display a very profound ignorance of how to actually invest. That in and of itself is not unique. There are professional hockey players who are highly skilled and highly experienced making lots of money in the NHL, but that doesn’t stop you from playing in your beer league for fun and recreation throughout the winter. The unique part about investing is that sometimes, those rank amateurs actually beat the professionals at their own game. It’s the equivalent of your beer league team defeating the Stanley Cup Champions. In investing, Mystery Alaska is an everyday occurrence! Why does this happen? Shouldn’t the professionals be able to always beat the amateurs? Shouldn’t their advanced education and experience make it impossible for amateurs to come even close to their performance? Logic would dictate that the know something professional should always beat the know nothing amateur. However, just as Mr. Spock said, “Logic is the beginning of wisdom, not the end."
I think there are a few things going on in investing which allow for the possibility of rank amateurs to perform extraordinarily well at times, and sometimes even outperform the highly paid professional investors of the world.
One of the reasons for this is that a market is such a complex system that it is not possible for a professional to have complete control over their performance. There are a great deal of factors which affect investment performance which are entirely outside of a professional’s control. In a hockey game where the conditions are controlled, a hockey team has a great deal of control over whether or not they win or lose. Sure it’s possible there could be some freak injuries or bad bounces throughout a game. But in a game of professionals vs amateurs it’s virtually impossible that a bad bounce or an unlucky break is going to turn the tide against the professionals. In investing however a bad break can literally make or break an investment and that’s true whether it was made by a professional or an amateur. If I invested in Tesla and the next day Elon Musk is diagnosed with terminal cancer, that would be something that would be almost impossible to predict. Sure I could factor that in to my analysis of how risky the investment was given the importance of Elon Musk to Tesla, but there’s really no way for me to know for sure that they are going to get sick and be unable to work, and 99 times out of a hundred, Musk won’t get sick and the investment works out just fine (maybe… it is Tesla after all). On the other hand, investors can sometimes get very lucky and generate huge returns without any skill. There was probably some fundamental analysis that GameStop was undervalued at $20 a share. There is no fundamental analysis that exists anywhere that GameStop should now be worth $200 a share and I certainly would argue that everybody who got rich on the share price going to $200, got at least partially lucky.
Tilting the Odds in Favor
So a lack of control over the outcome is part of investing. A professional can tilt the odds in their favour, but in reality there is still a very sizeable probability that they will perform worse than an amateur at any given time. The true professional will realize this and will stick to their strategy, even if it isn’t working lately.
Only a Limited Number of Options a Person Can Take
Another reason why amateurs will sometimes outperform professionals is that in investing there are only a limited number of options a person can take. At any given time a person can choose to “buy”, “sell”, or “hold” an investment. Because of this, even a random dart throwing monkey can be successful at investing if they get lucky. This Is different from an activity where there is a complex set of decisions and actions to take. For example, there is no scenario where that dart throwing monkey is going to successfully perform brain surgery. It’s simply too complex an activity for that to happen. Investing, which, at least in terms of outperforming a benchmark, is arguably as hard as performing brain surgery, is nevertheless simple enough that a monkey could outperform if it got lucky.
Certain Levels to Be an Independent Thinker
The two reasons above are important to understand when comparing an amateur’s performance versus a professional’s. However, they are not the MOST important reason in my humble opinion. The most important reason why amateurs sometimes outperform professionals is that investing is not a pure scientific endeavour which only relies upon mathematical skills or speed or expert knowledge. There is an art to investing which requires a certain disposition, a certain level of patience, a certain level of creativity, and a certain willingness to be an independent thinker. These skillsets can be found in both amateurs and professionals, and they are quite rare. There are many professionals who do not possess them.
Warren Buffett touched on these skillsets a bit in the 2019 Berkshire Hathaway shareholders meeting when he was asked whether a degree from a prestigious university was worthwhile and valuable for an investor. His response was, “…And I would rather have a person that was bright, but had Chapter 8 of the Intelligent Investor in their bones.” Chapter 8 of the Intelligent Investor is Benjamin Graham’s famous introduction of Mr. Market and encapsulates a lot of the skills required of an investor to master the art of investing. I think Buffett’s point is that a degree from a fine university is a good thing, but it doesn’t mean you will be a good investor just because you have one.
With all this being said, I’m not actually advocating that amateur investors should just start investing on their own and refuse to get professional advice (surprise, surprise). I think by and large the majority of great investors either are professionals or become professionals, because hey, if you’re good at something you might as well get paid for it. But I do think there is a lesson for all investors, amateur and professional to take from this article. There are many additional attributes required to master the art of investing. As an investor it’s important for you to first realize whether or not you have these attributes, and if you don’t (and the vast majority of people do not), then you need to find yourself a professional who does.
-Craig White, BA, LL.B., CIM®
Craig White is an Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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