Excellent article by Jim O’Shaunessy. Love the emphasis on overcoming human nature and working on your emotional weak points until they are corrected. Please take time to read the entire article!
“Years of experience have taught me that to be a successful active investor requires a very specific set of characteristics, and that many investors attempting to actively manage their portfolios today lack the emotional and personality traits necessary for success.”
“If you are one of the few, I think our current environment and the rush of investors into passive products will only increase your chance of doing much better than an index, but you must be brutally honest with yourself. Keep a detailed journal of all of your investments and note when you succeed and when you fail. Then work on your weak points until they are gone. If you can manage this, you will become a member of a shrinking, and yet potentially lucrative club, that of long-term, active investors.”
It’s very interesting and I buy it. Persistence and discipline whilst operating a process! Unfortunately the suggested approaches aren’t exactly the approaches Saul takes… (no technology, always pays a dividend…). B&W should love it though!
Ant
It is a very good article but I am always amazed how most articles are directed at fund managers, not private investors for whom tax is always a consideration (losing investments can have real value if sold). Being also a keen on ‘run your profits; cut your losses’, I think there is a strong place for that too; determination and persistence can be misguided! But it is definitely a ‘cut out and keep’ article for its insights. Thanks.
It’s very interesting and I buy it. Persistence and discipline whilst operating a process! Unfortunately the suggested approaches aren’t exactly the approaches Saul takes… (no technology, always pays a dividend…). B&W should love it though! Ant
I noticed that Mr O’Shaughnessy is a money manager. That means to me, he can’t make a living managing his own money, so he has to get other people’s money to manage. I would really like to see how much he has made in the market by himself for himself. I wonder if he has the courage to invest his own money and live off the results of what he can accomplish.
Saul has his approach and is very successful for a long time, doing what he does. I tend to think I’ve done reasonably well managing my money so far. I wouldn’t dream of managing other people’s money and while I can’t speak for Saul, I don’t believe he would either.
Since O’Shaughnessy is a money manager, I hope everyone realizes he is talking his own book, by pointing out many pitfalls to self managing and seeking to manage your money for you at a fee. I believe managers get about 1.5% per year on a $1M account or $150K over 10 years ($300K over 20 yrs or $450K over 30 years) For that kind of money you can afford to make a few mistakes as you learn. Or if you don’t learn, buy index funds like Warren Buffett says.
I believe managers get about 1.5% per year on a $1M account or $150K over 10 years ($300K over 20 yrs or $450K over 30 years) For that kind of money you can afford to make a few mistakes as you learn. Or if you don’t learn, buy index funds like Warren Buffett says.
Money managing is a more reliable income source than the stock market itself.
I suspect most big money managers do what I would do. Closet Index with 90% of the money and invest the other 10% or so in likely candidates. That way you will never underperform the indices by much and if you latch on to an Amazon type you will outperform.
Underperforming hurts your career more than outperforming helps it.
Meanwhile bull or bear that salary keeps flowing in.
I wouldn’t dream of managing other people’s money and while I can’t speak for Saul, I don’t believe he would either.
I tried it once for two friends. It was a nightmare. They questioned every decision, and when the market went down about six months into it, they got scared and pulled their money out at the worst possible time. Never again!
Professional management companies manage by group consensus. They don’t even manage their own money. Nobody wants to be blamed for bad decisions and all decisions are made by the group. That way there is no one individual to be blamed for anything. Even for their own money. As long as the fees keep rolling in, they all eat regularly. It isn’t really of much concern to them whether your portfolio thrives or not.
People that can’t manage their own portfolio and use a money manager aren’t likely to fire money managers in time to preserve the bulk of their assets, because if their experts don’t make money , they are usually too afraid to do it themselves.
I mean that I would use 90% (or a bit more) of the funds available to replicate the index I was being compared to. In most cases this would be the SP 500. You don’t need to hold all the stocks, 95% correlation can usually be obtained by using a lesser number. Therefore 90% of my returns could not lag the broad market index. I am bound to have at least a few ideas that maybe can beat the index . Stocks can go up a lot but only down what you invested. Therefore I would hope that the 10% would be enough to slightly beat the index, all that I need to keep my job.
Mutual funds in particular suffer from investor withdrawals at the worst possible time, when stock prices are low and liquidity has dried up. They can not sell big holdings. Conversely when the market is booming, funds flow in but managers can’t find any stocks at reasonable prices. This is probably why most don’t beat the SP500. Which itself is a managed index.
I had the same experience as Saul when managing other people’s money. Plus the fact that it made me feel worse to lose their money than to lose my own. I no longer do it even for family, limiting myself to pointing out when panic rules in the general market. Times when prices are low , relatively speaking.
I am managing two friends in addition to my own portfolio.
Fortunately, I haven’t had any of the problems Saul has. A friend of mine from church had her husband pass away in his early 50’s. She’s a widow with two kids. A financial planner “friend” of hers was “helping” her, and had fleeced about 15% of her money with a return of about -5% over two years (starting 4 years ago). How do some of these people live with themselves? Beats me. Another friend was had not been able to save much, and also asked for help cause he wasn’t sure what he needed to do for retirement. Fortunately, over the next two years they are both WAY ahead of the market.
Neither questioned the picks that didn’t work out, neither second guessed me or complained that the market hasn’t gone straight up, BUT I have learned that it is very stressful being responsible for other’s retirement accounts. Even when things have gone great. Under the right circumstances, I still would help others, but it would take a LOT to convince me, and I am not volunteering. As soon as I can get their IRAs on solid footing, I will move them to index funds.
Besides sharing a faith, I think that them seeing what 100% of their money working for them has put them at ease as well as their gains feel like a cushion to them. Still, helping others in this way really grinds on me at times.
Managing other people’s money is a losers game. I once managed someone’s money, with the proviso that I guaranteed a flat return and I got to keep anything in excess of that return. For some reason, this self-interested provision, made it successful. Otherwise, too much pressure to both not disappoint, and to at the same time show off how good you are. Two motivations that produce nothing but disaster.
Here on the Fool, and the Fool only exists as it does because those that are professional money managers (except for the very few rare persons) are worse at managing our money than we are at managing our own money.
So good we are all here and not dependent on the money managers. Of course most of us will panic and sell anyways at the absolutely worse times, but more of us will not than will those who have their money with money managers.
BUT I have learned that it is very stressful being responsible for other’s retirement accounts. Even when things have gone great.
Yes, it’s an enormous responsibility, and you feel very GUILTY if a pick doesn’t work out, or EVEN if the market itself is down, which makes no logical sense.
Big money is made by managing others people’s money successfully and being able to take the stress of doing so. When the portfolio goes up you make big money, when it goes down you still get some income which your clients don’t get. It’s most certainly Buffett’s strategy. Not for me, I can’t take that kind of stress.
One additional problem for investors is that probably half of money managers are either incompetent or crooks. After many years investing I believe there are only two avenue for an individual investor, either learn the trade and spend the time or buy index funds.
There is one statistic that people never or seldom trot out in these discussions, three out of four investors underperform the market averages. It has nothing to do with skill, it’s the natural distribution of wealth, it’s the Pareto Principle. To be in the top quartile you have to be exceedingly lucky or terrifically skilled.
An earlier poster mentioned that Jim O’Shaunessy’s piece was directed at money managers, not individual investors. That being the case, O’Shaunessy can assume what success means, beating other mangers. That should not be the goal for individual investors, our goal should reasonably be a comfortable and stress free retirement.
I’ve read one of O’Shaunessy’s books, What Works on Wall Street (I couldn’t find my copy). It can be summed up as buy low P/E stocks. Warren Buffett gave up on buying cigar butts. Louis Navellier has a different approach, he uses “What Works on Wall Street Now.” On a quarterly basis he backtests his stock screens to see which is currently working. All this work does not guarantee beating the market and it might not be the best way to spend your retirement unless you enjoy doing it.
O’Shaunessy’s seven points are well taken but, can you rein in your emotions? I know they are my worst enemy.
“I mean that I would use 90% (or a bit more) of the funds available to replicate the index I was being compared to…Therefore I would hope that the 10% would be enough to slightly beat the index, all that I need to keep my job.”
You realize that if that 10% of your total do not beat the market, you will still under perform the market just as well. You are only ready to risk that 10%.
With 100% in an index you will have the certainty that you will not undeperfom it.
Beating the S&P index is easily done IF one is willing to put in the time and work needed to research the stock. Most will not put in the time and work needed. Having a board like Saul’s Investing Discussions can give each investor the tools needed to easily beat the indexes. Listen to the old pros that frequently post here and allow their wisdom and experience to teach you. It can be profitable and enjoyable and slightly addicting…ok, maybe a lot! :–)
Beating the S&P index is easily done IF one is willing to put in the time and work needed to research the stock. Most will not put in the time and work needed. Having a board like Saul’s Investing Discussions can give each investor the tools needed to easily beat the indexes
The boss doesn’t pay anyone for not working. Yet some of these same people expect the market to hand deliver riches to them for sitting on their hands and not preparing themselves for the new retirement age. Yes medical science has given many a new retirement career timeframe of 20 to possibly 40 years and they won’t prepare for it.