I was fortunate enough to grow up and catch a little glimpse into the world of whispering stock tips, ego, greed and speculation - the late 90's and leading up to and including the GFC. I never really got it, but as a young kid, what did I know? All these experts must know more than me. I mean, look at them, in their blue pin stripe suits, driving around in their flashy cars. So I hired a stock broker to help me - I was no expert.
It was 2006, I arrived at 101 Collins Street, Melbourne's premier corporate building. Water fountains gently trickled, and busy foot steps echoed right through the marble interior. I rode the timeless elevator up to level 32. Ding. The elevator door opened and I arrived to one of the largest reception areas I had seen. A clean, fresh scent drifted through the conditioned air. Uncomfortable leather couches, an insanely large rug, and the most spectacular views of Melbourne's CBD was what I was presented with.
He arrived. The guru. The man with the ideas, wisdom, and acumen. Well, in my mind anyway. We sat in a meeting room, and he waffled off a bunch of questions, to which I provided responses. We were done in about 45 minutes, and on Monday morning I had a portfolio of stocks that was carefully designed for me.
I received numerous phone calls following, I bought stocks, I sold stocks, I participated in IPO's, I cut losers, I jumped on winners, I doubled down, all backed by rigorous research by one of Australia's largest and most prestigious brokerage houses, all in the pursuit of growing my portfolio. We were riding one of the country's largest commodity super cycles, how can anyone lose any money? I lost hundreds of thousands of dollars. I had carry forward capital losses sitting on my tax return for years to come - maybe this was one positive to take out of it all. No, in fact it wasn't.
The biggest lesson for me was this. No one has any idea what the f**k is going on. No one. Not the largest stock brokerage houses in the world, not the financial adviser who subscribes to the AFR, Bloomberg or Reuters, not the investment house who has a collective "150 years of experience" or a team of 20 analysts, and not the adviser who receives daily research from the street. No one! Some of the greatest investors of our era have no idea, and they openly admit it.
Since then, I have been investing passively in index and factor based funds - both managed and exchange traded funds. While most funds have lagged the market since the GFC, I have more than offset my losses and sitting on some very healthy gains.
Investing is bloody hard. A lot of what worked in the 80's and 90's just doesn't work anymore, yet many investment professionals are acting as if nothing has changed. Information is moving all around the world the fastest it ever has. No one needs to wait for tomorrows newspaper to work out what happened today anymore. Have you heard of Twitter?
If the last 12 months have taught me anything, it's that the world of financial markets is as unpredictable as ever. Imagine we are speaking in 2020 as the pandemic hit. And I whispered to you, that later in the year, a company named Pfizer will develop and announce a vaccine that will more or less save the global population from the virus, what would you do? You would be a fool for not buying the stock, right? Wrong.
Here is the performance of Pfizer (in red) versus that of the S&P 500 (in blue). The company that developed the vaccine that would be used by countries around the world is still trailing the S&P 500 index. Mind boggling.
Just think about that for a second. Even if you knew what events would unfold in the future, you would still not know how to play it! Think about the recent inflation burst, and gold as a hedge. The market is littered with such examples.
If you think for one second you or your adviser has some edge over the market, you are either hallucinating or delusional. This is further evidenced by the SPIVA data. In Australia, the percentage of Australian share funds that underperformed the index are as follows:
Over 1 year: 55.60% of funds underperformed
Over 3 years: 73.40% of funds underperformed
Over 5 years: 81.70% of funds underperformed
Over 10 years: 79.30% of funds underperformed
Over 15 years: 86.30% of funds underperformed
At best, you have a less than 45% chance of beating the index over 1 year, and 15%-20% chance over the long-term. You wouldn't play those odds at a casino let along with your investments.
I think the investing world has advanced a fair distance since then, more so in the last 10 years. The GFC was the nail in the coffin I think. Investors are far more savvy today than ever. They are informed and they are empowered. They can smell the bullsh*t a mile away.
Understand the things you as an investor can control, and be clear on the things you cannot control. And design a portfolio based on this. I'm not saying don't speculate, I'm not saying don't invest in individual stocks. Notwithstanding my points of view here, I still invest in and hold actively managed investments (only one), individual stocks, and Bitcoin, which I wrote about here. The point that I'm trying to make is that your portfolio should look vastly different to that of 5, 10, 15, 20 years ago. The world has changed. Your options have changed. Now it's up to you to change.