You don’t have to be right

I’m going to let you in on a poorly kept secret in the investment management biz.

Every day/week/month/quarter across the country financial advisors, fund managers, asset allocators, hedge fund magnates and pension consultants are making decisions for clients.  These professionals are recommending stocks or mutual funds to clients.  They are overweighting and underweighting sectors and asset classes.  They are making big macro calls on markets, metals, currencies and interest rates.  Sometimes they are large tactical shifts, and other times they are changes at the margin.

To make these decisions these professionals rely on fundamental analysis, technical analysis, historical patterns, personal narratives, anecdotes, gut feelings, political bias and their own investment worldview born of personal experience.

The numbers will prove that at least half of these stock recommendations, sector overweights and interest rate bets will be wrong, and the consultants will say things like:

“We were early.”

“The fundamentals changed.”

“The markets reacted irrationally.”

“The Fed is manipulating the market.”

The reality is that as we attempt to predict the future, we fail.  We still can’t do it. But many managers will provide a quick explanation for what went wrong and keep trying, keep promising.  Like this from Bill Gross after his fund dramatically underperformed in May.

Advisors and fund managers continue to get away with this for a simple reason: investors desperately want to believe that their advisor/manager has it figured out, that he will be the guy who beats the market. But investors are better served by remaining agnostic in their beliefs about near-term events, admitting that we cannot predict the future and stay focused on the things we can control.

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