“I Am Looking to Outperform the Markets by 4-5% a Year”

Lately, the day job has been inspiring many of our Philosophy Phriday posts. (This coming Sunday’s WaPo column was also inspired by what we see int he office).

Today’s post is another such example. Perhaps its because we run a somewhat different business model than is typical in the finance industry in the US. Our clients come to us through word of mouth and referrals, as opposed to the traditional cold calling/sales nonsense (which I despise). We run a more European model, which is low key and quite civilized.

Anyway, the other day, we received this inquiry in the office:

“I am interested in some alpha investing without excessive risk, perhaps looking for 4-5% greater than the averages.” (emphasis added).

Understand, that not every inquiry is a good fit for us. And what we do is not a good fit for every potential client. If we don’t think what we do will make the client happy — even if its the smart thing, the right thing for them to do over the long haul — we simply don’t take them on. This inquiry likely fell into that category.

But rather than just blow someone off, I always feel obligated to at least make some attempt to explain why he is unlikely to achieve happiness & wealth in his chase of Alpha. Call it tough love or the straight dope, but I have to at least try to help the guy get off his expensive, illusory alpha chasing hamster wheel.

Thus, I responded as follows:


I wanted to follow up to the automated reply you received from me yesterday. You noted that you were looking for “perhaps looking for 4-5% greater than the averages.”

The best doctors I know never mince words, and I agree with that philosophy, so here goes: YOU ARE HURTING YOURSELF WITH THIS PURSUIT.

The data on this is overwhelming and incontrovertible. Nearly all investment managers underperform; of the ones that out-perform, few do it consistently year to year, and of those who do, once you take into account fees, they become average.

Earlier this Summer, I gave a presentation to a room full of public pension trustees at Harvard (about 1.7 trillion dollars worth, not counting Calpers). Its called “Romancing Alpha, Forsaking Beta” — you can see it here.

The takeaway is that the mad dash for out-performance almost always leads to UNDER-performance. The huge public pension funds and many of the large Foundations are slowly coming to realize the truth of this.

If you are looking for someone who is going to find you the magic hedge fund that turns dross into gold, we cannot help. What we can offer you is a way to figure out what your needs and goals are, along with the healthiest, lowest risk way to achieve those goals.

There are some people who have yet to pay their tuition to Wall Street University. They shall do that over the course of their investing lifetimes through high fees, unnecessary taxes, costs and expenses. And the vast majority of these folks will underperform the suitable benchmarks. Net net they better enjoy this pursuit, for it will be more expensive than any mid-life crisis expenditures they might incur.

Patients are advised to stop smoking, lose the weight, exercise, reduce stress, cut out sugar, etc. when their doctors observe conditions they KNOW will manifest as future health problems. To this doctor, I tried to identify the risks to his future financial health. Otherwise, he will eventually pay some hefty tuition bills if does not change his investing ways.

Investors, heal thyself.

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