Olympic Investing

Life returns to normal. The kids are back to school. Routine sets in. Arriving home after a long summer away is a mixed blessing. There is joy to walking into one’s home, being greeted by your beloved pets, sleeping back in your own bed, unpacking and getting organised.

But another summer passes. The kids will never be 10, 12 and 14 again. Parents have aged another year. There’s a sense of grief at having left it all behind until 2025.

As I was thinking about our summer and all the things we did, all the places we visited, I realised how much was going on in the world. We had an historic election in the UK, the Paris Olympics and then all manner of craziness in US politics.  I found all three things utterly gripping.

We were in France for the Olympics, although not in Paris. It didn’t matter – you could feel the Olympic fever. People huddled over phones in restaurants, watching races, cheering. I love the Olympics – the sweat, the tears, the emotion, the highs, the lows. The human endeavour, determination and spirit that goes into representing your country, in any sport, is extraordinary to watch. Each of those humans is extraordinary. The hours that they spend on their craft, mastering each element of their sport. The sacrifices they make in their life to be there. The Olympics is when you get to witness it all.

Olympic training in France

You can’t be a half-hearted Olympian – it’s all-or-nothing. There’s no hack, or quick-fix. You can’t turn up and wing-it. Being the best, the absolute best in the world, at anything, takes hours and hours of dedication. Malcolm Gladwell called it the 10,000 hour rule. Practice, in the right way, for 10,000 hours and you will become a master.

Here’s the thing. That rule does not apply to investing. It not just ‘doesn’t apply’ but investing might actually be diametrically opposite to most other endeavours, where the more you put in, the more you get out.

Let me try and explain why putting in hours and hours of work into the craft of active investment management probably won’t make you any better than the market as a whole.

Michael Mouboussin coined the term the paradox of skill. This paradox explains why the 2024 Olympics saw the lowest number of world records since 2004. As sportsmen and sportswomen become more skilful, there is a reduction in the difference between the players and it removes the ability for any one person to generate outsized success. This shrinking gap means that luck becomes more important than it previously did. The more skilful the competitors, the more luck influences outcomes.

When a swimmer enters a pool, or a sprinter lines up on the track, what matters is their relative skill and strength versus the others. To win the gold they have to be faster and stronger than the others in their race.

When you are a professional investment manager, your competition is not the other individual investment managers. Your competition is the collective wisdom of the market. Your absolute skill is what matters, not your relative skill.

An athlete who has put in their 10,000 hours of training and made the cut to represent their country went to Paris thinking ‘I have a chance’. ‘I can beat the others’. An investor who picks stocks with the goal of beating the market is not just saying ‘I am smarter than those around me’, he/she is saying ‘I am smarter than the entire market’. That takes some hubris.

And here’s the thing. Like today’s athletes, today’s investors are smarter than ever. Charlie Ellis, author of seventeen investing books, wrote, “over the past 50 years, increasing numbers of highly talented young investment professionals have entered the competition. They have more advanced training than their predecessors, better analytical tools and faster access to more information.”

Morgan Housel explains how ‘finance has scooped up the smartest minds coming from top universities over the last two decades.’

However, unlike athletes at the Olympics where records continue to be broken (even if at a lower rate), professional investors are not getting any better, despite their smarts.

Recent data showed that over 90% of US equity funds underperform their benchmark over a 10, 15 and 20-year period. The funny thing is that the longer the period, the worse the investment managers do.

Like I said, the opposite of the 10,000 hour rule.

So, here’s what we do instead. We don’t try and beat the wisdom of the market, we participate in it, fully. We own the whole market, thereby knowing we get our share of market returns. Over the long-run, almost all those who try and beat the market will end up underperforming it.

You are not different. The active manager trying to sell you a smart-sounding strategy is almost certainly not different. When it comes to investing, we don’t have to be an Olympian.

Georgie

georgie@libertywealth.ky