- Christian Armbruester
Looking for Genius
I suppose we all think that by applying our mind and all that we have learned in years of study, we can add value when looking at the world of investments. Even further, those that don’t know the ins and outs of financial markets, must believe that someone knows, otherwise why would they get paid as much as they do. It is estimated that the global fund management industry has some $79 trillion in assets under management. Discounting for passive investments but accounting for hedge funds, I would estimate the average management fee is around 1% per year. That means, we are paying $790 billion to people we believe know something we don’t. But do they?
A couple of weeks ago the esteemed individuals, stemming from those highly acclaimed universities and working at those hugely prodigious institutions of JPM told us to buy, whereas UBS told us to sell. Clearly, they had done their homework to come up with their conclusions, so how could they be so polar opposite and moreover, how are we as investors supposed to know who is telling the truth?
Last I checked, things either go up or down. We can apply technical analysis, or sophisticated computer models to analyse historical price data, but as a matter of regulation every investment strategy has to display the following disclaimer: Past performance is not indicative of future performance. That is because patterns that we saw in the past may or may not repeat themselves, but that’s not even the hardest part. The most difficult question these models are trying to answer is, of course, knowing when these patterns will repeat themselves. That’s called timing, and it simply means that we can be 100% right, but still get it wrong if we get our entry or exit wrong.
Then there is macroeconomic analysis, and nothing could be more exciting than looking at Chinese growth, US consumption, Japanese manufacturing output and European monetary policy to take a view on the markets. But of all the intellectually stimulating exercises, trying to make sense of the world by analysing an infinite set of variables that can change every second is akin to discovering the holy grail. I once worked with a world-renowned forecasting expert who built a computer model that took all the known factors into account to make his predictions. By his reckoning, he spent more than 150 man-years in development time (by employing countless super smart PhD students), and the results were still not much better than 50/50. So, do yourself a favour, stop wasting your time trying to predict the unpredictable and for goodness sake, stop paying people to flip a coin.