It’s 1994. Iomega (presently Lenovo) is expected to release a product that will revolutionize the PC and storage world. The product is the zip drive – a floppy disk storage system. Like the one in the picture below…you know, the one that’s sitting next to your computer (NOT!).
The stock was hot. It began with a whisper, then to web forums, and eventually to Wall Street who were touting the stock to anyone that was breathing. The story was spreading and it was on fire. People who lived near the company’s factory in Utah, would drive by the factory on a Sunday to see how crowded the employee car park was. And if it was full, the story was, the company can’t meet demand – keep buying the stock! The stock gained 2,135% in one year. Eventually CD-Roms and USB drives killed the Zip Drive, and the company.
Story-telling. Once upon a time, investing began this way. Once the portfolio was built, data was used to market it – we like ABC Company because <insert reason here>, and we expect earnings to surprise to the upside. There was no evidence behind the decision making. It was a gut-feel. A hunch. A story. Eventually, investment professionals realised this game wouldn’t last forever. The narrative changed from telling stories about individual companies to telling stories about investment themes and managed funds – we like Europe because <insert story here> and ABC manager has a strong track record in this space, we expect strong upside from here.
These statements would imply anecdotal insight into the future of a company, region, fund, and ultimately, it’s stock/s.
A lot has changed over the last 25 years. Today, portfolios are constructed very differently. They are constructed using math, data and evidence. And story telling is used to market them. Unlike 25 years ago, the story would sell the stock, and if the data was compelling (after the fact), it would be used to market the stock/manager.
Some money managers still operate like its 1994. Other than a very small handful of managers, most are not very good at it (managing money). The difficulty for end investors and investment professionals selling these portfolios of stocks, is that investors can only identify the winners after the fact, which is of no use to anyone.
Here’s the latest (Australian) data showing the percentage of funds that under performed their benchmark.
The numbers are quite staggering. This is not an Australian phenomenon, the numbers are similar all around the world. Click here if you want to see the rest.
So who should care? Every investor who sometimes confuses brains with bullshit stories should care. Investors should ensure their portfolios are built using evidence and data, not gut-feels and hunches.