The next great competitive advantage for investors is here (and has probably been here for awhile). And everyone can take advantage of it: Those who can cut through the clutter of today’s information garbage heap and see the world in its simple clearness likely prosper most in their investments.
Ken Fisher is a long-time firm believer in “top-down” money management. The concept is widely known: Identify the BIG forces that truly drive stock returns over time, and use those as the premise for investing tactics and strategy. Yet in practice, few really get this in their bones—figure out the most important factors and forces that drive the global markets and focus on those. This investing philosophy creates a beautiful simplicity in all things—organization, management and life generally (in and out of the office). Think BIG, global forces, always.
It is especially and indubitably true for investing in the stock market. In my decade plus in the investing world, I’ve witnessed a spectacular explosion of information—speed and dissemination. More information is available to more folks than ever before. Particularly at the professional level, where firms spend millions on data and ever-faster computing mechanisms, the degree of complexity of financial and economic analysis has similarly exploded. We have more tedious minutiae, more grandiose statistical complexity—and it’s expanding.
Yet, performance of overall managers hasn’t improved even one whit. It’s still true most folks—be they regular Joes or high-falutin’, high-flyin’ hedge funds, consistently underperform their chosen indexes over and again. Why?
The current market cycle is a wondrous example: As most folks capitulated and panicked in late 2008, markets recovered in V-shape fashion, with the smaller, deep value, low quality stocks (that got hit hardest) bouncing the most. As this bull matures, the switch seems to be occurring to bigger, high quality, growthy names. Amid it all, we’ve had US debt fears, PIIGS fears, double-dip fears, housing fears, employment fears—you name it. And it’s not to say these don’t matter, but in the end, there are larger forces at work: The global economy recovering and growing in a world of greater free trade, rising production and consumption in the now collectively large Emerging Markets. Those are the big forces—the ones that matter most!
I’ve read mountains (almost literally) of highly rigorous, empirical and complex analysis on every conceivable topic about the markets in the last few years. And few or none effectively identified these big forces—the ones that matter most. They’re all caught up in the ultra-short term or far too small to matter.
Simply, more information and complexity are not key drivers of returns and never have been. And won’t ever be. More information and data is great! Yet, if you can’t use that information to determine the big important trends, well, you can have 5 analysts or 50, 10 million bucks worth of data or 10 bucks, and it’s not going to change your chances for outperformance.
What drives market outperformance? Knowing something others don’t and acting appropriately on that conviction. This is desperately difficult to do in practice, and I continue to be very proud of working for a firm that aims consistently to do this over time. Simplicity is the best—and, at this point, maybe the only—consistent way to achieve such results.
So if you can’t say what your current investing strategy is in one sentence, you may be cooked. In a world where very smart people foolishly create castles out of sand with their ever more complex strategies, you can think simple, big forces and have a tremendous competitive advantage.
One last note: This method also breeds personal sanity in the long run. It feels better—safer—to be more complex. It feels like you’re doing more, being more diligent in your analysis, “evolving”—and that makes for psychic satiation. Identifying the big, simple forces moving the global stock market induces some anxiety because instead of allaying fears with ever more complexity and minute analysis (busy work) you instead must raise conviction and analysis in your top-line decisions.
And this is tough to do—it requires courage. But whatever you do, don’t get lost in the weeds of increasing complexity. Seek the clear, straight-forward simplicity of big forces.
(You can read more about this concept in my book, 20/20 Money.)