Nobel Laureate Daniel Kahneman famously noted his surprise at what his research had uncovered with respect to investors and investing:
"What’s really quite remarkable in the investment world is that people are playing a game which, in some sense, cannot be played. There are so many people out there in the market; the idea that any single individual without extra information or extra market power can beat the market is extraordinarily unlikely. Yet the market is full of other people who believe them. This is one of the great mysteries of finance: Why do people believe they can do the impossible? And why do other people believe them?"
In this new era of AI when all seem to be speaking of a new paradigm (perhaps in computing science or business using the technology) that astute, superstar investors can manufacture miraculous and untold riches for investors if only they will turn over their hard earned shekels to them for access to their secret investing knowledge.
For those of us somewhat jaded investors who have heard this story before, we just sit back with Cheshire smiles secure in the knowledge that we've seen this all before and we know how it all ends.
WSJ columnist Martin Zweig provides us with the results of three current superstars (or perhaps better described as "shooting stars").
Leopold Aschenbrenner’s hedge fund Situational Awareness was up 240% this year and amassed $45 billion at it's peak.
Cathie Wood’s ARK Innovation ETF skyrocketed 153% in 2020 and attracted $20 billion by year end.
Remember the dot.com/Tech era -- 1999? Ryan Jacob posted a gain of 216% in a previous fund so they showered him with $300 million at the start of 2000.
Benjamin Graham (the father of "Security Analysis") had warned decades before: "...Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial. They have usually been able to do it for a while—or at least to appear to have done it—and they have inevitably brought losses to their public in the end....."
"Aschenbrenner’s fund lost 67% in July and it's diminished assets have been acquired at a substantial discount. ARK Innovation has trailed the S&P 500 by an average of nearly 23 percentage points annually since the end of 2020. Jacob Internet lost 70% in 2000 and 56% in 2001—and, since its launch, has lagged behind the S&P 500 by nearly 14 percentage points annualized."
So back to the opening of this article and Kahneman's observation! And yet investors keep pursuing wonderful stories or are they better described as myths? These stars invariably turn out to be like the famous mythological character Icarus. You may remember he was warned not to fly to high with his wings of feather and wax which enabled him to escape captivity. And yet he did so, too close to the sun, only to have the wax melt which sent him falling into the sea.
There is a plaque in front of the NY Public Library which has a famous quotation from Willa Cather"
"There are only two or three human stories and they go on repeating themselves as fiercely as they had never happened before...
There are only two or three human stories and they go on repeating themselves as fiercely as they had never happened before...
There are only two or three human stories and they go on repeating themselves as fiercely as they had never happened before...
There are only two or three human stories and they go on repeating themselves as fiercely as they had never happened before...
There are only two or three human stories and they go on repeating themselves as fiercely as they had never happened before...." continued for eight more lines.
You get the picture. Investors love stories (even if they turn out to be myths). Kahneman further observed: "Stories Trump Statistics."
The real secret sauce to successful long-term investing is the discipline not to follow the siren songs of the superstars looking for the miraculous but stick with the tried and true that has succeeded over decades and centuries! Perhaps not as satisfying to our entertainment gene but certainly to our financial one!