Marks talks in depth about how luck and circumstance come into our lives in many shapes and form. He uses the example of the country we're born into, the income level of the family we're born into and the year we're born all as having a significant factor in our ability to achieve certain objectives. All of these are pieces of luck, or, if you prefer, divine providence, which straight from the off give a better or worse chance of 2 people, with the same intelligence and knowledge of a subject, achieving the same results. It is these such circumstances he points out that are often neglected to be mentioned when we believe we have achieved something entirely through skill alone, yet will often be brought up ad nauseum should "events" conspire against us. As he points out the Twitter CEO's tweet of "Success is never accidental" and the popularity of the phrase "you make you're own luck" present a skewed view to the world that when we achieve success, it is purely due to our own making.
The truth, as Marks points out, is much more different than that. Even the most determined, intelligent and hard working individual may not get the desired events necessary for their plans to succeed. None of us in the modern world truly hold the ability to prophesise. However, as Marks points out:
"We arrange our lives – or, in investing, our portfolios – in expectation of what we think will happen in the future. In general, we get the desired results if future events conform to our hopes or expectations, and less-desired results if they don’t.........even the most rigorously derived view of the future is far from sure to be right. Many other things may happen instead."
In a nutshell, man proposes and g-d disposes.
Harping briefly back to my last post with this in mind, it almost seems absurd when thinking about the analyst criticism heaped on the central banks for getting their projections of unemployment and economic improvement incorrect. If we accept that the future is an unknown, and that it can only be "modeled" and expectations "predicted" to a certain degree, we must also accept that future events sometimes don't always conform to what even those we consider expert to have predicted. Meanwhile we often heap continuous praise on those, as Marks puts it, "in the investment business who get famous for having been “right once in a row.”"
As part of his realisation of the luck afforded him in his investment career, Marks talks of the opportunity landed to him to get involved in two inefficient markets early on, in both high yield bonds and distressed debt, before they became so well known as to remove the obvious inefficiencies which previously existed. Such opportunities in the information age, he points out, are now few and far between, with the ability of algorithms and widely availability of information on all topics making a true arbitrage opportunity hard to spot. It doesn't mean that there is a lack of undervalued investments in the market, after all he would have long retired if he believed that, it just means it is much harder to take advantage of them.
The problem of course lies in the ability to truly pick those undervalued whilst they are still undervalued in the market. We might crunch all the right numbers and make all the right projections, but an unprecedented macro event could be the luck that causes our meticulous predictions to be undone turning a certain winner into a sure fire loser. The planning was all right, but the desired result unfortunately went against us.
None of this means choosing the correct investments is entirely down to luck, but it serves as a warning for those of us who believe that they have superior skill to outperform the market on a constant basis. I can't help but agree with Howard Mark's final assertion that, "it makes sense to accept that most games are no longer as easy as they used to be, and that as a result free lunches are scarcer........it will be harder to earn superior risk-adjusted returns in the future, and the margin of superiority will be smaller."
If this is indeed the truth, then where does that leave those of us looking for a way to get a return on investment for our future?
If we are honest with ourselves, can we really believe that we have the ability to either pick the stocks or the fund managers that will outperform the market for our given time frame. As common sense will point out, the market return is simply the average return of all investors. Some will outperform the market and some will underperform the market. What is to say we will have the skill and luck required to be or to pick the ones with the ability to outperform the market. As John C. Bogle points out in a letter for the CFA institute:
"If “active” and “passive” management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar."
Hence by investing in funds that we believe will outperform the market there is the potential we will only achieve the average market returns at best, but at a greater cost. That is, if our luck even holds that much.
So why put ourselves through this? Back in my post on December 4th I warned people to invest their money in what they do understand. The solution I believe is to stop telling ourselves that we need to outperform the market and instead to follow the market. If you are taking the true long term view (especially from a pension perspective in your 20's, 30's or 40's) then there is no need to fear the dips and falls which occur on a cyclical basis. The likelihood is that, over the 40 year span you are investing, then you will see the required level of growth in your portfolio. The fear of those with this strategy is that when the market falls (like it is now and certainly like it did in 2000-03 and 2008-10) they have lost out. But the comfort should lie in the fact that when the market rises they too will rise with it - they have removed an element of luck attributable to the active manager or stocks they might otherwise have chosen.
So long as you are looking to a long term horizon, the palpitations associated with extreme market moves should be less than those associated with trusting your judgement and luck in picking an active fund hoping for it to outperform. As Pharrell might have put it, it's a question of waiting up all night to get lucky with your investments or doing your best to sleep soundly at night. You just have to hope that luck let's you sleep through.
