Taking the advantage dating for amateurs and professionals
Photograph: Spencer Platt/Getty Images Inside information, better tools, better connections, access to almost infinite amounts of data – it’s fair to say ordinary investors can’t compete against professional investors in so many respects. For all the talk about dumb money and smart money, ordinary investors have some pretty big advantages over their professional counterparts.
The pitfalls inherent in the money-management business are highlighted by the recent difficulties experienced by British fund manager Neil Woodford.
A value fund that is benchmarked to any index, said Woolley, will likely consist of some carefully-selected cheap stocks combined with dozens of expensive stocks bought purely to ensure the fund’s results don’t deviate too much from the benchmark’s.
Agreeing, Wiggins describes benchmarks as a “behavioural disaster” that fosters short-termism, saying the “spectre of short-term benchmark comparisons looms large and inevitably drives decision-making”.
Still, GMO fund manager and value investor Jeremy Grantham has long emphasised that professional investor behaviour is driven by career risk.
“Missing a big move, however unjustified it may be by fundamentals, is to take a very high risk of being fired,” Grantham wrote in a famous 2012 client letter.
All investors can suffer from short-termism, says fund manager Joe Wiggins, “but it is easier for amateur investors to avoid it”.Woolley noted that fund managers seek to beat benchmarks indices but not by too much, as a portfolio that is radically different from an index runs the risk of serious underperformance as well as major outperformance.That limits the potential damage caused by incompetent fund managers but it also drives perverse behaviour, with managers forced to buy certain stocks – even bubble stocks they know to be overpriced – if their returns deviate significantly from the index.“They can make some sensible long-term decisions at the outset and review their portfolio sparingly; avoiding the emotionally exacting experience of living through your long-term investments on a day-to-day basis.Professional investors possess no such edge – they are compelled to constantly monitor their portfolios and must deal with the behavioural issues that stem from this.” Ordinary investors are free to “do nothing”, says Wiggins.
That’s why, as value investing icon Seth Klarman once put it, the “single greatest edge an investor can have is a long-term orientation”.