The Stock Market Doesn’t Care How Hard You Try
Posted December 26, 2019 by John Posey
Today’s post is inspired by a video by Barry Ritholtz, Michael Batnick and Morgan Housel which can be viewed below that is about how effort impacts investment performance. It’s a great video even if you only watch a few minutes. When it comes to investing, the correlation between effort and results isn’t that strong which is a significant contrast to other areas of life. Alpha in the investing world refers to the ability to beat the market or generate excess return over a benchmark. As conventional wisdom goes, the more effort you put in, the better results you are going to get. I would say I know this to be true first-hand. I also think it’s safe to say most top performers in any craft would tell you it takes hard work, discipline and determination to master a skill or achieve at a high level. But this universal truth doesn’t translate 100% to being a successful investor which can be a source of frustration if you fail to recognize it.
Overconfidence can become easy in investing the more research we put in. We can get a false sense of conviction the more time and energy we put towards making calculated investment selections, especially when coupled with the benefit of 20/20 hindsight on some of those winners we picked in the past…why didn’t we buy more! The unfortunate truth is the market doesn’t care about how hard you try or your time horizon. Personalizing financial goals around what we think the market will do can be a fool’s game if you are not fully acknowledging the unknown. I still think history is the best indicator we have to work with while accepting that the present will always provide some unique circumstances and events. Once you accept the market is going to do what it’s going to do, it’s wise to consider you may require a long hold period (5, 10, 15 years & beyond!) to achieve the results you are striving for.
The more I think about it, the more I can relate this concept to the life of a farmer. A farmer can have the best technology, equipment, land, labor, agronomist data and marketing strategy that a smart producer can put together but mother nature, world trade policy, global commodity markets, major medical events among several other factors outside their control always have the ability to disrupt the best of intentions. All that effort doesn’t always pay off. Sometimes farmers also have to deal with long hold periods to achieve the results they’re after too. Successful financial planning is a lot like successful farming. You make the best decisions you can with the information at hand and you make adjustments as necessary to support your long-term vision. It’s a continual process of matching investments to desired outcomes which changes over time.
Many successful farmers acknowledge they have chosen a way of life and likewise many successful investors acknowledge they have chosen a way of thinking. This type of thinking recognizes extra effort doesn’t translate into outperformance.
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