After another month of modest, slow and steady gains in the financial markets, even in the face of what seems to be unrelenting negative news in the “real world,” we consider the existence of so many “winners” in the financial markets, compared with what appears to be precious few losers A recent piece by Jason Zweig in his “Intelligent Investor” column” (WSJ 8/25/21), titled “Losers: The Secret History”, focused on this topic.
The following points are quoted from Zweig’s article: “How often have you been online, or viewing social media, and seen speculators bragging about the killing they just made on cryptocurrency or meme stocks? That can make it hard to remember a basic truth: You won’t be hearing from, or about, the losers. While the few who made money are strutting in the spotlight, countless more who lost their shirts slink into the shadows…. As I [Zweig] wrote in 2014, ‘When talking about their trades, losers use a muzzle while winners use a megaphone. If you hear more about profitable trades than unprofitable ones, you get a distorted view of how good that particular trader is, how profitable this kind of trading is overall, and your own chances of learning how to be good at it.’ That’s true for individual securities, for sectors and strategies, for entire markets and asset classes. Survivorship bias – our cognitive blindness to the invisible multitude of losers – warps how we see the world of investing.”
Zweig’s article then provides a definition and example of survivorship bias as it relates to professional investment portfolio management: “An overestimate of the average past returns of financial assets or investment managers, caused by including only those that survive. As time passes and companies or asset managers go out of business, their returns disappear from many databases, making average returns appear higher in hindsight than they were in reality.”
At Park Piedmont (PPA), we subscribe to these ideas. They seem to be alternate ways to emphasize that history is written by the winners; that past performance is in no way predictive of future results, because who among us can predict the future; and that no one consistently outperforms the broad markets — either by picking individual stocks/bonds, or market sectors, or even the broader markets. Trying to time when to buy and sell these various components of the financial markets simply doesn’t work over long periods. At PPA, we primarily use the most broadly diversified market index investments to implement our clients’ asset allocations. But we are mindful that even this approach, by necessity, involves a modest degree of selectivity and timing that we strive to minimize. This is true because not all the investments are of one kind or done in the same time period. We also know, by the way, that Mr. Zweig also favors, at least in his public writing. low-cost, tax efficient indexed investments to develop diversified portfolios.
A further parallel can be drawn by comparing investing and gambling. Gamblers are notorious braggards when they win, and rarely discuss the times when they lose. It is often said that the worst thing that can happen to a gambler is to win the first time, because it makes them think they can win consistently. We think this is a common plight for investors as well. Perhaps they think they have some “proprietary” system or methodology that can be followed to outperform the markets, or “beat the house.” But this seems virtually impossible to implement in practice, either for amateurs or professionals.
Wishing good health and happiness for you and yours.