WHY DO SO MANY INVESTORS THINK AVERAGE IS GOOD ENOUGH?

August 10, 2016

The Summer Olympics are now taking place.  If all of the participants were offered a guarantee that their performance would be average, what percentage do you think would accept that offer?  I think the right answer to that question is zero.  I have always thought, and still do, that one of the things that makes life interesting is trying to be better than average in any endeavor.  That said, over the last few years investment in passive investment vehicles has skyrocketed, while assets in actively managed investments have declined.  Why?

In 1985, Warren Buffett, in his annual letter to Berkshire Hathaway shareholders had this to say:
“What would be more advantageous in an intellectual contest – whether it be bridge, chess or stock selection, than to have opponents who have been taught that thinking is a waste of energy?”
So, to answer the “why?” above, people would rather be average than put any effort into thinking or into finding managers to do that thinking for them.  I honestly don’t believe there is any other explanation.

Mr. Buffett’s comments were made over thirty years ago.  Throughout his career, he has never had the slightest interest in being average.  Investors today seem to be fixated on investment strategies founded on the premise that thinking is a waste of time and energy.  The other side of the equation is clear:  investors willing to do otherwise have an enormous advantage.

Almost anywhere you look you will see comments that choosing a path of active vs. passive investing is useless, as most active managers do less than average.  That is true.  But many do better, and some much better than the averages.  Why not seek them out, or find professionals who know who they are.  But that requires some thinking and some intelligence.  Most “investors” can’t be bothered.

The real point may simply be that “passive investing” may not really be investing at all.  Benjamin Graham once said that “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.  Operations not meeting these requirements are speculative.”  Based on Mr. Graham’s comments, passive investing is not really investing at all, as it rejects the need for “thorough analysis.”

The big shift to passive investing began during the “great recession” not too many years ago.  And now, with many markets at record highs, even more money is flowing into passively managed funds.  I think I understand the rationale:  many people are lazy and brainwashed by the constant bombardment of “you can’t beat the market.”

You can, of course, but it takes some work.
Howard Goodman
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.

This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation).  The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.

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HG Partners Limited is an independent company. Scotiabank companies have no liability for activities outside of HollisWealth.