- From Matilda (the musical): Miracle
One can hardly move for beauty and brilliance these days.
It seems that there are millions of these one-in-a-millions these days
“Specialness” seems de rigueur.
Above average is average; Go fig-ueur,
Is it is some modern miracle of calculus,
That such frequent miracles don’t render each one un-miraculous.
I took my girls to see Matilda recently, the musical written by Tim Minchin based on Roald Dahl’s classic book. I wasn’t sure what to expect, but when it opened with the song ‘Miracle’ which includes the above words I knew I was in for plenty of laughs and a good time. It also let me know that I wasn’t alone in wondering how the current generation of children had seemingly become so endowed with such superior genes as to make them all gifted and talented and above average – and why I had missed out!
Unfortunately as we know the maths doesn’t work this way, and it is impossible for everyone to be above average. The truth is that most of the population will be clustered around the average, whether it be in relation to height, intelligence or athletic prowess as examples, with the rest dispersed more broadly above and below.
This idea reminds me a lot of the investment management industry. There is a large proportion of the industry that is focused on trying to outperform the market, essentially trying to beat the average return. Their investment philosophies sounds plausible, and they talk about only investing in undervalued companies and how their superior skills and talent, or their algorithms can reliably do this. As a result of this self professed skill they ask you, the investor, to pay them a higher fee on the promise that they will generate above average returns for you.
The problem with this theory is that there are tens of thousands of people across the world trying to do the exact same thing, and the average return is based on the returns they all are able to generate individually. There will be some who perform better or worse at any point in time, but these do tend to move around over different periods of time – a bit like elite athletes who are in form for a period of time and then fall out of it. What’s more, when you add the hurdle of the additional fees charged by a manager who is actively trying to beat the average, it becomes even more difficult for them to do so. And that’s before we look at the after tax position which can be far different from the headline figures.
While there are undoubtedly some investors who do reliably generate above average returns over a statistically significant period of time, these are far less common than the marketing departments at investment management firms would have you believe. Ultimately too they are countered by ones who deliver significantly lower returns.
Perhaps we would be better served by forgoing the pressure of trying to be special and accepting that average can actually be good, particularly when all the factors are considered.
If you would like Second Opinion on your current investment strategies, feel free to contact me.