Beating Professional Fund Managers

When we entrust money to a professional portfolio manager with billions of dollars under management we might assume that these people are better investors than you or I (^_^)  After all they get paid huge salaries and oversee important private equity funds, mutual funds, or even pension funds like OMERS, CPP, California Public Employees, NY State Teachers, etc. Everyone’s future to some degree depends on how well these professionals manage our money. But I was watching a talk by Warren Buffett and I found it a bit disappointing when even large fund managers can fall pray to the herd mentality.

Pretty much for every consecutive decade in the last century our lives have been improving and we’ve been getting wealthier, as measured by GDP per capita. But investors tend to look only at the past performance of a chart rather than the future outlook of the underlying economy. When stocks are doing well they get very excited and think “well I made money last year, so this time I’ll make even more.” And when times are bad they think “Stock market sucks. I’m going to do something else with my money.”  Pension fund managers apparently also follow this thought process. This is why we have huge swings in the stock market even though the economy tends to improve more gradually over time.

Buffett said he wrote an article for Forbes in 1979 about investor behavior. He wrote how come that pension funds in the early 70s allocated 100% of their net new money into the stock market because they were wild about equities. Then when stocks dropped and became a lot cheaper in 1978, pension funds put in a record low of just 9% of their new money into stocks. Does that make any logical sense to you? (O_o)

Back to the talk he said “People behave very peculiarly…because they’re human beings. They get excited when others get excited….They get fearful when others get fearful. And they’ll continue to do so…This makes for huge opportunities…. The country will do very well over time, but you will see these huge waves [in the stock market.] If you can stay objective throughout that. If you can detach yourself temperamentally from he crowd, you get very rich. You don’t even have to be very bright. It doesn’t take brains. It takes temperament. ”

So if we can remain objective with our investment strategies and look at underlying fundamentals of businesses and the economy instead of how stocks have moved in the past then we can probably outperform even pension fund managers (゜∀゜)

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Random Useless Fact:  Moose have no upper front teeth.