Time Well Spent

With 97%+ of actively managed large cap funds failing to outpace the S&P 500 from 2001 to 20161, it can seem like there is a lot of man (and woman) power going into investing strategies that would do worse than just buying an index fund like John Bogle has been preaching for over 40 years.

Sometimes I think “what if all this brainpower went into trying to cure deadly diseases?” Obviously, this is just a fun game to play, but in reality many forms of cancer may have been cured, Alzheimer’s may have been preventable, and the list in my imagination goes on and on. So let’s take a step back and think why all this time and energy is pouring into investing, that could be spent on higher purposes.

There is a low barrier to entry. On my 18th birthday, in 2006, I opened my own brokerage account. I had free trades for 90 days. In my mind, I was a hedge fund manager. If I wanted to cure cancer, no one (rightfully so) is going to take me seriously unless I have a PhD or MD. That takes too much time and effort. Hedge fund managers only need a Series 65 license which can be taken and passed in an afternoon.

Early confirmation bias. While I was 18 and my own hedge fund manager, CNBC was saying the Chinese middle class was expanding, therefore I bought a Chinese life insurance company. It proceeded to double. This was almost too easy. My earlier beliefs that I could beat the market were now confirmed.

Quick response to action. Within a couple weeks, I can tell if the investment I made is paying off or not. In the US, it takes 12 years on average for a drug to go from the laboratory to your pharmacy.

Some people live for competition. It has been widely documented that Michael Jordan is an avid high-stakes gambler. Once he no longer could compete at the highest level in the NBA, he moved on to gambling. There is no harder foe than a casino who has a house advantage baked into the odds of the game to play against. Same reason some of the billionaire hedge fund managers still work 16 hour days to try and eek out some extra alpha and beat their competitors in their annual returns.

Very few people (outside of professional basketball players) would be able to walk off the street and beat Jordan in a 1 on 1 game. But Joe or Sally from Queens could beat David Einhorn or Warren Buffet in a stock picking game over one year or even three years fairly frequently. Investing gives the home player a chance to play with the big dogs. It would probably take Joe or Sally months upon months of reading about medicine to even grasp the basic concepts, never mind thinking of a cure for a deadly disease.

In the end, investing is just easy to get started doing. It’s easy to keep score and the scorecard is money, which our society puts a lot of value on. Unfortunately, these benefits can partially be to blame for taking the best and brightest minds away from other fields of study.

1 – Per John Bogle in The Little Book of Common Sense Investing

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