No. of Recommendations: 47
. . . raised by ADrumlinDaisy:

And this raises the question of whether there are any investing Mozart’s out there?

Excellent question Adrumlin. The short answer is YES, there are investing Mozart’s (IMs) out there. That is the good news. The bad news is that they are not available to manage investments for the masses. Stated differently, we can’t all compose music like Mozart.

There are several people/organizations that spend considerable time and efforts searching for IMs.

1. Jack Schwager has written four books about IM’s. His first book: Market Wizards: Interviews with Top Traders was first published in 1989.[1] Jack interviewed 17 different IMs from different market segments. Some were futures and currency traders, others traded stocks and a few traded anything and everything. We have heard of a few of these folks, but most of them are still not widely known names. Each interview provides tips and insights into what makes them IMs. Most of the IMs detailed in this book are short term investors aka traders. Their time horizons range from seconds to maybe months. This is one of the primary reasons that 99.9% of investors CANNOT duplicate their results. Even if Jack published an exact, mechanical formula for each IM, the small investor cannot utilize it.

Jack published a book on hedge funds this year entitled: Hedge Fund Market Wizards.[2] Jack traveled the world to interview different hedge fund IMs. One interesting take away from the book is the diversity of approaches they use. These IMs are able to use totally different and in many cases conflicting approaches but make them work. Jack did a video interview on the book if you are interested.[3]

In the interview, Jack talks about Ed Thorp as probably being the best IM he is aware of. Ed deserves his own separate post.[4] Ed is best known for inventing “card counting” in Blackjack. Using math and simulations, he figured out how to consistently beat Las Vegas dealers. The techniques worked and Ed was banned from all casinos. Later, Ed applied similar techniques to investing. In one documented period, his hedge fund was profitable in 217 out of 220 months for a 98.6% win rate. The losses in the three losing months did not exceed 1%.

The fact that a small number of hedge fund managers have consistent, outsized returns might be sufficient proof that IMs exist. Once again, I do NOT see much here that is actionable by small investors.

2. Mark Hulbert has been tracking investment newsletters since 1980 by publishing the Hulbert Financial Digest.[5] The HFD was acquired by Marketwatch in 2002, but still relies on Mark to run it. Mark has documented a few newsletters that have outperformed buy and hold on a risk adjusted basis over the long term. The outperformance is slight, maybe one or two percent. The majority of newsletters have NOT outperformed as you would expect. Another takeaway is that no newsletter outperforms year in and year out. They seem to go in phases. If you follow today’s winner, you might be disillusioned by the underperformance next year. There are probably a few newsletters that might fit some average investors. It depends on investing style. Some of the newsletters trade frequently. Others are closer to buy and hold. Each investor would have to spend time seeing if there is a fit or not. My apologies for not being able to cite a specific newsletter or two for further investigation. I no longer follow Mark’s work all that closely.

3. David Swensen is arguably an IM with his “Yale Model.” I recently posted about a fund that attempted to duplicate David’s results, but was unsuccessful.[6] David outperformed the median endowment fund by 5.8% per year over 18 years. I think this is sufficient proof that David is an IM. With the closing of the Yale Model fund that was attempting to follow David’s principals, it is reasonable proof that we can’t duplicate David’s results. I had this conversation with a money manager that manages >$100 billion. His take was that the Yale Model was widely misunderstood, despite the fact that David wrote two books about it.

We could undoubtedly cite other examples of IMs based on hard data, not rumor or innuendo. From this, here are a few takeaways I think I know:

1. By definition “average” investors will underperform the markets, regardless of which market it is. This is a simple mathematical statement because of the “friction” in the system, i.e. commissions, management fees, etc. All investors can NOT be from Lake Wobegon and above average.

2. The “house” always wins. It is exactly the same as gambling. You will “pay the vig.” (Vig is short for vigorish which is essentially the bid/ask spread plus commission.) IMO, Wall Street will continue to “win” as far as the eyes can see. Wall Street will continue to collect the vig and make it as large as possible. I am far more confident of outsized returns for Wall Street than I am for the average investor. If we could all be like Wall Street and make money on both sides of trades, life would be good. And yes, there certainly is some competition on Wall Street, but the facts are that US sends a much higher percentage of income to Wall Street than say 50 years ago.

3. The average American has ZERO chance of investment success since they save way too little. Why waste your time? The average family income is around $50k/year. The average 401k/IRA is around $50k at retirement. I don’t care what withdrawal rate you assume, you cannot make a meaningful difference in retirement with that low of savings. Even if you had been able to get an extra 1% or 2% return, it would not be a life changing amount.

4. Every square micron of the investing space is being actively looked at by many investors. The markets have become much more efficient with the widespread availability of computers and data. For every strategy can you name, chances are close to 100% that others have better data that you and have already investigated it. Getting an investment “edge” is harder than ever IMO.

5. For METARites and the other investors that have enough investable assets to be worthwhile, there MIGHT be a few promising areas for outsized returns. By outsized, I mean outperforming your index by 1% to 4% per year. The major caveat with this approach is that the nominal returns might be poor. Would you jump for joy if your returns were 2% per year while the SP 500 was 0% per year? I don’t think so. Just beating the benchmark might not be such a great goal for the next decade or so.

6. High inflation-hyper inflation is the elephant in the room. So far, all of the pundits forecasting inflation have been proven wrong or at least early. Personally I am in the camp that ugly inflation will be the end result of our fiscal policies. We might not be alive to see it, but I think it is the highest probability outcome. I had this conservation with a TBTF board member this week. He had the same opinion as to its inevitability. I also recently discussed it with the >$100 billion money manager. He had the same opinion as to its inevitability. In the meantime as Chuck Prince would say: “As long as the music is playing, you've got to get up and dance.” As investors, we are playing the “we are smarter than everyone else and will be able to get out before bad things happen.”

7. BOTTOM LINE is that IMs exist, but most of what they do is NOT actionable by the average investor.



[1] Jack Schwager Market Wizards: Interviews with Top Traders

[2] Jack Schwager Hedge Fund Market Wizards.

[3] Jack Schwager interview about Hedge Fund Market Wizards.

[4] Ed Thorp facts from Wikipedia

[5] Mark Hulbert: Hulbert Financial Digest

[6] Yodaorange METAR post: Everybody Can’t Be Like Yale
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