Beating Professional Fund Managers

When we entrust money to a professional portfolio manager with billions of dollars under management we might assume that these people are better investors than you or I (^_^)  After all they get paid huge salaries and oversee important private equity funds, mutual funds, or even pension funds like OMERS, CPP, California Public Employees, NY State Teachers, etc. Everyone’s future to some degree depends on how well these professionals manage our money. But I was watching a talk by Warren Buffett and I found it a bit disappointing when even large fund managers can fall pray to the herd mentality.

Pretty much for every consecutive decade in the last century our lives have been improving and we’ve been getting wealthier, as measured by GDP per capita. But investors tend to look only at the past performance of a chart rather than the future outlook of the underlying economy. When stocks are doing well they get very excited and think “well I made money last year, so this time I’ll make even more.” And when times are bad they think “Stock market sucks. I’m going to do something else with my money.”  Pension fund managers apparently also follow this thought process. This is why we have huge swings in the stock market even though the economy tends to improve more gradually over time.

stock market, professional fund managers, dow historyBuffett said he wrote an article for Forbes in 1979 about investor behavior. He wrote how come that pension funds in the early 70s allocated 100% of their net new money into the stock market because they were wild about equities. Then when stocks dropped and became a lot cheaper in 1978, pension funds put in a record low of just 9% of their new money into stocks. Does that make any logical sense to you? (O_o)

Back to the talk he said “People behave very peculiarly…because they’re human beings. They get excited when others get excited….They get fearful when others get fearful. And they’ll continue to do so…This makes for huge opportunities…. The country will do very well over time, but you will see these huge waves [in the stock market.] If you can stay objective throughout that. If you can detach yourself temperamentally from he crowd, you get very rich. You don’t even have to be very bright. It doesn’t take brains. It takes temperament. ”

So if we can remain objective with our investment strategies and look at underlying fundamentals of businesses and the economy instead of how stocks have moved in the past then we can probably outperform even pension fund managers (゜∀゜)

Random Useless Fact:  Moose have no upper front teeth.

moose taking a photo, professional investors

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My Financial Independence Journey

I can say that as of Dec 2012, I was beating the S&P500 with value investing (a la Buffet) in dividends and capital gains. I’m not sure how much longer that streak will last, but it is encouraging nonetheless.

02/19/2013 3:37 am

I agree with Buffett, (but then who doesn’t??). There’s no magic ingredient to beating the market, and a lot of what he says is just (un)common sense. If you pick wisely, there’s not much reason why you shouldn;t beat the market into a cocked hat over the long term, especially when you consider the size of the market.
Take the S&P500, which apparently makes 8% a year over the long term. Surely it’s not that hard to cherry pick a smaller number of the best S&P500 performers and thus make a better return than the S&P500 overall??

02/19/2013 5:01 am

Train yourself to be a what I call a Contrarian of Opportuntity. By this I mean when the markets look bad and everything seems to be falling apart, this is the time to pull up the boot straps and look to those companies that were doing things right before the markets tanked. Take when 911 happened, markets dropped – I saw a buying opportunity, borrowed a little and went all in in the 3 days that followed – withing 3 months I had almost a 25% return… in 2007/2008 as the markets began to froth and understand we were entering a “finacial crisis” I took out some profit and money and switched to cash and changed assett loaction – sat in cash for a month or so and bought a cottage i had been looking at for a few months prior – with no one wanting to buy becasue of the looming crisis i came low ball to the table and got a great deal. as the markets attempted to sort them selves out, I borrowed at record lows and rebuilt my stock portfolio and have again done quite well on the way to recovery. For me we have about… Read more »

02/19/2013 6:16 am

I mean, he always says: Be greedy when others are scared, and fearful when others are not.

We do silly things as humans. We panic, sell when we shouldn’t and buy at the peak ($700 for AAPL, anyone?) when we should wait to see what happens after running numbers and having a gut feel for what you see around you.

hungry hungry artist (@blerghhh)

I picked up some shares of apple in 2005… Oh yeah!

John S @ Frugal Rules
02/19/2013 9:17 am

The crazy thing is is that there is no real special secret to winning in the market. It’s disciplined investing and not jumping off the same bridge that everyone else is. Sure, it’s not “sexy” but slow and steady wins the race for an overwhelming part of the time.

02/19/2013 10:03 am

Andrew Hallam’s book Miilionaire Teacher goes into great detail on why MF suck. As an aside it’s very entertaining, given away a dozen copies and had only positive feedback

02/19/2013 11:27 am
Reply to  Rob

Mutual Funds may suck, but the 2 I have been with for almost 15yrs now have done quite well, thank-you very much, with little effort on my part. Bissett Cdn Equity -F (1yr +15.4%, 15yr +7.4% anualized) and Phillips, Hager & North Dividend Income -A (1yr +11.2%, 15yr +8.2% annulized)… And yes those returns are net of fees. Both have good historic track records, low MER’s and great investment “teams” as opposed to specific fund managers that run them. So before someone tells you MF’s suck do your research, otherwise, it’s just gambling… – Cheers.

02/19/2013 4:59 pm

Are professional fund managers necessarily the best people or are they just after their percentage. What is all this ‘market knowledge’ about? Presumably it is not insider trading.

The fee percentage is generally of the fund value, not your profit. So it makes only a little difference if the fund doesn’t do so well but if your fund starts to lose money – ie it is going south – then while you lose money, the fund manager still gets paid his percentage, albeit a slightly smaller value.

There are better ways to do this sort of thing.

Financial Independence
02/20/2013 9:24 am

People can not predict future and investment in a stock market for the most of us is not a second job.
How many hours people actually do spend studying their investments and have education to do so?

That is why. Like when there us a hurricane people ran, but nobody is moving out from New Orleans or Hawaii just now. Everybody hopes for the best…

Mo' Money Mo' Houses (@momoneymohouses)

Love those useless facts! Moose, who knew?

Elle P.
Elle P.
02/21/2013 8:30 pm

….but how do they chew?!

warren buffet is the man.