There’s a viewpoint that I sometimes hear when it comes to investing, and it’s plain wrong. Granted, the viewpoint is seductive. It is seductive because it brings order to randomness. It serves as an explanation for things that are unexplainable.
The viewpoint goes like this.
“There are people out there who know everything about investments and markets. These people move stock prices to their advantage. The rest of us are just puppets, dancing to their tugs of the string.”
These puppeteers, the thinking goes, have the world figured out, including the financial world. They buy when prices are low. And then they create artificial demand, causing prices to go up, at which point they sell and collect their effortless and bulging profits.
These masters of the universe apparently sit around and figure out new and better ways to make money in the stock market. Meanwhile, the rest of us are simply playing their game. We think we are autonomous, but in fact our moves are known in advance by this elite class of investors.
I’m not buying it.
No one has everything figured out – especially not in the stock market.
The reason is simple. Markets are just a collection of opinions held by people. And people, as it turns out, can be crazy.
Sir Isaac Newton, famous for his mathematical and scientific intellect, literally set forth the laws of physical motion. He was a genius. But after getting swept up in a market mania of his time, and losing more than $3-4 million in today’s dollars, he said that he “could calculate the motions of the heavenly bodies, but not the madness of the people.”
Making money in markets doesn’t necessitate unrivaled intellectual horsepower, it requires the right behavior and, sometimes, a unique perspective.
To believe that some people have the market figured out, allowing them to make outsized and consistent profits, means one of two things. Either the foolishness of their fellow citizens can be forecasted, or the market is rigged. Neither is plausible.
Even the best investors of all time suffer through periodic bouts of embarrassment. For example, Bill Miller ran an investment fund in the 1990s and early 2000s that experienced phenomenal performance. Miller’s fund beat the S&P 500 index, a broad market barometer, for 15 years in a row.
That type of consistent outperformance was unheard of in the industry. Miller was renowned as an amazing investor, gracing the covers of magazines and newspapers.
Then, from 2007 through 2011, Miller made ill-timed bets on financial companies, producing losses of more than 50% in his fund, far worse than the market’s performance. Not only did his streak end, but Miller’s reputation as an investor was badly bruised.
Miller, like others before him, looked like he had the investing world figured out until he didn’t.
Thinking that a subset of investors can predict the market is a lazy explanation for something that’s hard to put your finger on. Namely, the role luck plays in investing.
In markets, people get lucky, and that luck masquerades as skill.
Miller knew this better than anyone. In fact, after beating the market for the 14th year in row, he gave an interview to the Wall Street Journal. He told the interviewer, "As for the so-called streak, that's an accident of the calendar. If the year ended on different months it wouldn't be there, and at some point the mathematics will hit us. We've been lucky. Well, maybe it's not 100% luck—maybe 95% luck."
Believing that some people have the market figured out gives far too much credit where credit is undue.
No one has everything figured out.