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This Is How We Invest, and Why—Part Two: Don’t Try to Outguess the Market

This Is How We Invest, and Why—Part Two: Don’t Try to Outguess the Market

The lady on the television screen seemed very smart. She had an impressive educational background and lots of experience as an analyst for a Wall Street investment firm. She was also very persuasive as she stated her case to the CNBC host that, based on her analysis of the data, the stock price of the company they were discussing was primed for a big increase.

The gentleman on the screen also seemed to be very smart. He had an equally impressive educational background and similar experience as an analyst for a different Wall Street investment firm. And he was equally persuasive as he told the same CNBC host that, based on his interpretation of the data, he was convinced the stock price of the same company would decline.

Both analysts gave their opinions within the same segment of a CNBC morning show. Both were likable and seemed to be honest and well-intentioned. And, based upon the way they presented their argument, they certainly believed in their interpretation of the data. But they obviously both could not be correct.

This scenario plays out almost every day in the world of investing. Whether the analysts are discussing a company, a sector of the economy, an asset class, or the overall market, there are always differing opinions. So, as an investor, what should you do?

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Our advice? Don’t watch. If you must watch, make sure you do so for entertainment purposes only.

In Part One of our series that explains How We Invest, and Why, we discussed the efficiency of the markets and how the first step in our process is to acknowledge that we don’t know more than “the market.” When a Wall Street investment firm, or an investment manager, makes a prediction about the price of a security, an asset class, or the market, they are making a claim that they know more.

We don’t believe that they do, and we believe that their directional calls are nothing more than guesses.

This leads to the second building block in our investment process: Don’t try to outguess the market. The pricing power of the market works against investment managers who try to outsmart other market participants through stock picking or market timing. Over the 15 years ending December 2016, 82% of all U.S. mutual funds trailed their respective benchmark. An investor is better off owning the benchmark, via a low-cost index fund, and not paying the high cost of having a manager trying to pick stocks or time the market.

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It’s not easy holding this view. Wall Street wants you to think that the millions of dollars that they spend on fund managers and research departments can give you an edge if you invest with their firm. And they spend millions more on advertising that tries to convince you of that “fact.” But remember, every time you, or your fund manager, makes an investment move based on their research (i.e., guesses), you face transaction costs and possible tax consequences that can negatively affect the return of your investment portfolio.

We believe, and the evidence confirms, that a much better and less costly way to invest is to own a globally diversified portfolio using asset-class-based mutual funds or exchange-traded funds (ETFs). Don’t try to guess which company is going to be better than another. Own them all. Don’t try to guess which country around the world will be the next “winner.” Own them all. By owning them all through diversified funds, you can take the guesswork out of the investment process. And you will also reduce your portfolio risk in the process.

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