In perusing one of the trade journals I was struck by a listing of "the best performing funds," which was followed by a list of the worst. What interested me was the fact that I found the "leading loser" was a (formerly) highly respected manager who, in fact, was glorified in the media as well as the investment industry as one of its leading gurus. Not only that, he had been on top of the best performing funds list for several years.
I wondered: what had happened to this individual? Had he become suddenly stupid or, perhaps, entered the early stages of dementia or were there some personal problems over the last few years that were distracting him?
The reality, of course, was like other supposed gurus before him, he had not had any of the foregoing issues befall him but, rather, it was just the normal investment cycle that had done him in – perhaps just temporarily, perhaps for a longer spell.
One of the major reasons – maybe the most important – that I had transitioned my practice, many years ago to its present form was just such a series of problems with really smart investment managers that I dealt with. I had been led to them by the famous (or infamous -- take your pick) Morningstar five stars or by other supposedly reliable indicators, my own due diligence and – primarily past performance. My experience was that after a good performance run, they suddenly and unexpectedly fell off the proverbial cliff. When I investigated or even spoke with them, nothing appeared to have changed and they were just as intelligent as when I first came upon them. Yet, performance was nowhere to be seen. What I came to learn is that this is not an all together unexpected phenomena. This pretty much happens to all of them – even the "best and the brightest!" Worse, sometimes these periods of terrible performance can last for very long periods of time. If you'd like to know how long these "spells" can last, consider that for one period of 17 years, the S&P underperformed T-bills and CD's!
What I discovered – as if a switch had been thrown in my brain – was not so much these were unintelligent individuals – they were all bright and intelligent (that, of course, is part of the problem) but, in part, their success was due not so much to their innate stock picking or market timing ability, but rather to luck! They just happened to be in the right market sector or asset class when it got hot. We saw this in the late 60's and early 70's with the so-called "one decision" or "nifty fifty" stocks. We saw it again with the tech boom and large company growth stocks in the 90's (I hesitate to even say the words: dot.com!). Do I even have to mention the financial services and real estate companies of recent memory?
The foregoing is, of course, the reason that we diversify, as all investors should, across multiple asset classes and countries. Neither I nor the geniuses who inhabit the canyons of Wall Street know what the next booming asset class is going to be or which will become the best country or countries to invest in. Thus, the only prudent course of action is to allocate properly, diversify and rebalance a portfolio on a systematic basis. Over the long-term, this has proven to be one of the only consistent systems that works successfully for investors. Of course, a key factor here is to remain disciplined rather than to follow the siren song of "performance!" Much easier said than done – which is a conundrum that all investors face. Thus, the need for a coach to maintain that discipline!
So, if you relied upon the experts or the media to put you with the "best" investments and the best managers, think again – more than likely, they were just lucky – but that's the past, not necessarily your future!