What U.S. Open Tennis Can Teach You About Investing

I am a big tennis fan. I followed the men's and women's championship matches at the U.S. Open with great interest. No one gave Sam Stosur a chance against Serena Williams, including the expert commentators who seemed mildly amused at her prospects for success. The reality is that Stosur was the vastly superior player (at least on that day) and had a fairly easy, two set win.

Lesson No. 1: Experts in many fields have no better predictive powers than you do. This is particularly true about investing. Most tennis commentators were former world-class players, which gives them some credibility. Relatively few brokers and advisers have any background in finance or economics. Even if they did, there is no evidence of their ability to pick stocks, time the markets or pick "hot" mutual fund managers with any greater accuracy than you would expect from random chance.

The winner's check of $1.8 million was presented to Ms. Stosur by the head of "wealth management" at JP Morgan, which sponsored the event. It is my view that advisors who use the term "wealth management" are referring to their uncanny ability to transfer the wealth of their clients to their own pockets. I hope this doesn't happen to Ms. Stosur, who seems like a hardworking tennis professional worthy of much better.

Here's some data about JP Morgan that Ms. Stosur and others should consider when evaluating their investment prowess. Like most brokers, JP Morgan has a number of proprietary funds. I compared the performance of these funds to their benchmark index over a 5, 10, 15 and 20 year period. The analysis was complicated by the fact that JP Morgan, as is typical in the fund industry, routinely folds or merges poorly performing funds, so long term data is not really representative because it does not include the poor performing funds.

When you evaluate this information, keep this in mind: How difficult should it be for investment managers who profess to have investing skills to simply beat their designated index?

I found 75 funds with data for the past 5 years. 28 percent of them underperformed their index.

The number of funds declined to 56 for the past 10 years. 12.05 percent of them underperformed their index.

Only 27 funds had data for a 15 year period. 59 percent of them underperformed their index.

For the past 20 years, only 12 funds had data and a whopping 75 percent of them underperformed their index.

Lesson No. 2: Sam Stosur should take the championship check from JP Morgan, but she should not give it back to them to invest.

Neither should you. And that lesson is equally applicable to all brokers and advisers who claim to be able to "beat the markets."

Dan Solin is a Senior Vice President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

 

 

 

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Comments

[Freedland]

04:55 PM on 09/21/2011

Dan, you are right on the money regarding predictions which are usually incorrect, especially those regarding the future. I believe that even your numbers are optimistic and I have seen numbers that indicate that a higher percentage of money managers are unable to beat the various stock indexes over several different time periods when you include taxes and capital gains as well as management expenses. As you explained, many poorly performing funds are merged into other funds or are terminated which affects the real numbers. One day you should explain the use of the "dividends received" loophole that eliminates almost all taxes on dividends paid from one corporation to another such as the dividends paid from GE, Goldman and BofA to Berkshire Hathaway. That is one way to beat the market if you can get the right deal. But there is no evidence that money managers add any value to a portfolio and that many cause a decline rather than an increase in value to the fund.

[fopplssiegeparty]

12:30 AM on 09/21/2011

Thanks Mr. Solis!

My favorite saying about Wall Street:

"They take your money and their experience and turn it into their money and your experience."

[fopplssiegeparty]

09:51 AM on 09/21/2011

Mr. Solin, sorry.