Wimbledon Final All About Skill, Gambling All About Luck
Last Sunday I was watching Great Britain's Andy Murray become the first British tennis player to win the Wimbledon Championship since 1936. It was an epic final pitting Murray against former champ Novak Djokovic. I was amazed as I watched these two guys pound shot after shot at each other in a match that lasted more than three hours.
As I watched the match, I was left with the thought that nothing about the match was a coincidence. That the match was so close, 6-4, 7-5, 6-4, that each game seemed to last 45 minutes, and that these two guys had made it to Center Court in the championship match of the most prestigious tennis tournament in the world was all about skill.
Andy Murray has been playing tennis since he was six years old. He has hit thousands of forehands, backhands, serves, volleys, and overheads. Plus, he goes through an extremely grueling training regimen that allows him to survive three to four hour matches under grueling conditions. The same can be said of Djokovic and all the top tennis players. They have developed a skill that is repeatable, reliable, and measurable.
Unfortunately, for investors with the maze of statistics the investment industry throws at people it is easy to believe the results the mutual fund managers are achieving are the result of skill as opposed to pure luck. If you look at the top 25 performing mutual funds we often see some pretty familiar names consistently. We see Vanguard, Fidelity, T. Rowe Price, but what investors often don't do is take notice of the name after the fund. We don't take time to see if for example Fidelity's Magellan Fund has stayed in the top 25 from the previous list. We don't take notice of whether or not it was Vanguard's Windsor Fund or their Wellesley fund that has maintained it's earlier ranking. If we did we might, rightly so, see that the skill we perceived the mutual fund companies to have, isn't a skill at all.
Here's the statistics, as measured by Morningstar Inc. In a given year only about a third of all mutual funds will outperform its benchmarks, and each and every year the third that outperformed its benchmark the previous year has been replaced by a new batch of top performing funds. It gets even worse the longer time frame. In any ten year period of time, none of the funds outperformed their benchmarks. Andy Murray can measure per match how many first serves he can get in, and he can measure how many points he can rely on winning as a result of a certain percentage of successful first serves and it is measurably reliable. So why can't the best educated financial minds of the investment world consistently achieve superior results?
The answer lies in what they are engaged in and what they are doing with investors money.
A tennis player can learn the right way to hold a racket and the motion necessary to hit a topspin forehand and then go practice it until they get it right. They have control over how much facility they will develop. A mutual fund manger can look at the books of a publicly traded company, they can attend stockholders meetings, talk to executives of a company, read reports about a company, and solicit opinions of their colleagues, but none of that will give them more control over their stock picks.
That is because everything they are reading is based on something that has occurred in the past, and with that information they are trying to figure out what is going to happen tomorrow, next month, next year, the next 20 years, etc. There is no one who has control over tomorrow no matter how much research or analysis they put into it. It is why the Prudent Investor Law of 1990 states, "Bargain shopping in an attempt to separate the winner from the losers through forecasting and analysis is deemed wasteful." I wouldn't want my life savings any where near a prediction or forecast about who is going to win next year's Wimbledon title.
It's not the easiest thing for investors to do, to rise above what is worthless rhetoric as opposed to valuable investment advice. The recipe for investors is to be able ask and answer the right questions. In the case we are using today, investors want to ask, can you identify the warning signs that you are gambling and speculating with your money vs. prudently investing it? If you can you will go along way towards avoiding investment advice that is dependent on a prediction and save yourself a lot of wasted time and money.
Brendan Magee is the founder of Inevitable Wealth Coaching. With questions, call 610-446-4322 or e-mail Brendan@coachgee.com