Warren Buffett wrote in his 1992 annual letter to Berkshire Hathaway shareholders, “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.” While cheeky in tone, Buffett highlights two very notable and crucial points.
He clearly identifies one of the real culprits of bad investment behavior; stock market forecasts. Into this category, I will also lump every type of financial media commentator who insists on shouting at you when markets are down and providing their own market forecast (read: guess). Stock forecasters, highlighted by 24/7 financial media, have time and time again, proven their worth…or definitive lack thereof. You see, if forecasters were worth their salt, or any salt for that matter, wouldn’t investors be better off? Wouldn’t investors have experienced less stress and better investment returns?
Let’s take a look.
During the same time that the market forecasting business boomed in viewership, revenue and footprint – the past 20 years – let’s look at how investors did. Buffett mentions this group in his second notable point; “grown-ups who behave in the market like children.” But what does this mean? Well, there’s poignant data to display and prove this childlike behavior in the markets.
Each year, DALBAR looks at how the average investor has fared over the past 20 years, compared to a benchmark. They review the results of the average stock invesTOR vs. the average stock investMENT return and the results are staggering. Over the past 20 years (ending 12/31/2014), the S&P 500 has averaged a return of 9.85%. During that same time frame, the average stock market investor (equity investor/the person) has averaged 5.19%. The invesTOR underperformed their investMENT by 4.66%! Something isn’t right here.
Presumably, all the investor had to do was to buy their equity investment, subtract costs, and just hold on to it. Had they done so, they would have enjoyed a much closer return to the equity investment. But instead, they listened to market forecasters. They bought mutual funds that were too high-cost. They got emotionally involved with the financial media. And it cost them dearly.
At this point, you might find yourself saying, “Okay, that’s unfortunate. But, what about the professionals?” What about the active money managers whose self-proclaimed job it is to outperform the market? After all, on average they charge substantially more than passive index funds, so they must earn that extra charge, right? Their stated objective is to outperform these indices, so if they charge so much, they must do their job… right?
Let’s take a look.
The research and data company, S&P Dow Jones Indices, provides an annual research report, ‘SPIVA (S&P Indices Versus Active)’. This report looks at the performance of active money managers across many disciplines and asset classes. Active money managers are the professionals who believe their skills are superior in picking the winning stocks or bonds. SPIVA looks back over the past 10 years and reports how the active managers have done as compared to their benchmark. Again, we find staggering results. On average, 86% of domestic equity, active money managers have underperformed their benchmark over the past 10 years. 86%! In other words, 86% of domestic equity, active money managers didn’t do better than the passive, unmanaged index, which they use as a measuring stick for success. By their own measure, they were unsuccessful. Paltry results, at best.
So what’s an investor to do?
The lesson here is as fresh today as it was in 1992 given by Warren Buffett. Market forecasting and the financial media world are here to entertain. There is no accountability behind what they say, no track record, and by no means, no fiduciary obligation to provide you with proper advice specifically for your personal situation.
So in a world where action presumably trumps inaction; when doing something always seems to be the solution; before you take action, take a step back. Remember the first study showing how well your peers have done as compared to similar investments, or the actual funds themselves. Remember the second study showing that active managers have generally and convincingly underperformed their benchmark over a sustained period of time. Then make a decision. Decide which side of those statistics you want to be on. Then, ask yourself, “What gives me the best odds of success of reaching my goals? How do I stack the odds in my favor?” You may just find that there IS a different way. (hint: there is).
Perhaps re-reading Mr. Buffett’s quote from 1992 will also help you remember that history may not repeat itself, but it often rhymes. It’s a forecasters job to provide entertaining, but accountability-free, opinions. Buffett calls these opinions the “poison” that leads investors to “childlike behavior in markets.” But you can prevent that behavior, because now you know what the poison is and how to avoid it. Now you know what it takes to behave in the market like an adult. After all, Buffett seems to have done okay following this advice.
Source: S&P Dow Jones Indices, S&P Global, SPIVA U.S. Scorecard, 2015
DALBAR, Quantitative Analysis of Investor Behavior, 2016
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