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Chasing the Cat

How important is it to “beat the market’?

Depends.

Are you a hedge fund manager or a mutual fund manager, whose ability to do so determines how much in assets the fund can raise? Are you a proprietary trader with a bonus tied to exceeding one benchmark or another? OK, in these cases beating the market is very important.

But are you, well, anyone else? OK, then in your case, it is the most unworthy and counterproductive endeavor imaginable. Unless you are doing this for fun and not long-term prosperity. If this is “a game” for you, something you’re engaged in for thrills, an ego stroke or a time-killer between Vegas jaunts, then we are speaking a different language entirely.

Prior to comparing your returns to this or that index and then tearing out your hair over them, ask yourself whether or not it should matter. If you are speculating for the sake of speculation, by all means, grade yourself. If you are running a fund, then you won’t need to grade yourself because you are already being judged as we speak. Only 39% of active managers beat their benchmarks in 2o12, which means more than half of the fund industry is under this microscope now and the light in their faces is a harsh one. Not a pleasant place to be.

And never mind comparing yourself to an index, it’s hard enough to keep up with this orange cat from London named ‘Orlando’ who took on a gaggle of supposed market-beating fund managers:

By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat’s portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals’ £5,176.60.

This cat, a fucking ginger no less, threw a chew toy at the stock table pages of the Financial Times and beat guys with decades of experience and unlimited research at their fingertips.

If you are anyone else besides a professional trader or fund manager, I’d recommend skipping this exercise entirely. It will not help you and can possibly drive you mad. Ask yourself the correct questions, the ones with answers that are actually relevant to you. That question for most investors is an obvious one: “Are my investments enabling me to maintain my purchasing power into the next decade, and the decade after that.”

Don’t run around chasing stock-picking cats if you don’t need to. If you’re not running a fund benchmarked to an index, alpha generation should not be your priority – peace of mind should.

Read Also:

39% of Fund Managers Beat the S&P in 2012 (The Big Picture)

Investments: Orlando is the cat’s whiskers of stock picking (Guardian)

In Investing, No Need for Sudden Death (New York Times)

 

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

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