Millennial investors in the US should feel very fortunate to have so many good financial bloggers to learn from. The likes of Josh Brown, Ben Carlson, Morgan Housel, James Osborne, Patrick O’Shaughnessy, Cullen Roche are all worth reading. I would particularly recommend Michael Batnick, aka The Irrelevant Investor, who is also Director of Research for Ritholtz Wealth Management. In this, the first in a two-part interview, Michael recalls his early career and how it taught him valuable lessons.
How did you get into wealth management?
I graduated in December of 2008, and as you remember it was not the greatest time for the economy. I got a job at a financial planning company. Or at least that was what they referred to themselves as; it was really an insurance company. I was there for about 18 months and I was pretty horrified by the experience. I didn’t know what I was doing. I was going out and making cold calls and introducing myself to people, not knowing what to sell or how to talk to them. I was just flapping, like a bird out of water. A good client for that company would be somebody who purchases a financial plan, an annuity, life insurance, disability and long term care insurance. What a conflict of interests that is. They also sold expensive mutual funds — no transparency, high fees — and I just said this is not for me. So I left in the middle of 2010 without securing another job. I couldn’t get a job. I was just very down on my luck. I was trading stocks for about two years, very unsuccessfully. Just sort of learning the language and the workings of the market. And then I met Josh Brown (at Ritholtz Wealth Management), whom I had been following for several years, at a train station. We had grown up in the same town. I introduced myself and got lucky enough to be interviewed and ultimately hired.
Did you enjoy life as a trader?
I loved it. I loved the game. I loved playing it. And I think I learned by experience. But I wasn’t very successful at trading stocks. I read all of the Market Wizard books, and how seductive are those books? You read about people like Paul Tudor Jones, and you say “Man, those guys have it figured out.” But, if you think about the investing greats, there really aren’t many people on Mount Rushmore. There’s Buffett and Lynch and so on, but there aren’t too many household names. The reason why is that it is exceedingly difficult, over any meaningful period of time, to beat the stock market.
What’s the most valuable lesson you learned in those early days?
One of the most important things in investing is self-control. It is exceedingly difficult to think about the long term because we live, we think, we act in the short term. So when there’s volatility in the market, it just feels good to do something, anything, to eliminate the pain that you’re experiencing. But the problem is that you have to get it right twice. So you have to sell, which is a temporary relief. But then you have to buy back in. And the most optimal time to buy is going to be when there’s the most fear and the most chaos. And that is really, really difficult. Maybe you could do it once, but you’re certainly not going to be able to do it again and again over the course of your investing lifetime. So it’s a game that really isn’t worth playing. For 99.9% of people beating the market is not necessary. It is very costly and expensive. The opportunity cost of missing market returns is very expensive. So I would say that the most important thing for the investor at home is to not try and beat the market, and to aim for market returns. But it’s much easier said than done. To quote Charlie Munger, “Anybody who thinks it’s easy is an idiot”.
When you say it’s expensive to try to beat the market, how expensive are we talking?
There are a few things going on there. Over the last 20 years the average long-only stock fund returned around 8% a year. And the average investor in those funds returned just about 2.5%. And the reason why there’s such a giant discrepancy between the fund returns and the returns that the investors got is what is referred to as the behaviour gap. In other words, consistently, you’re going to buy and sell at the wrong time. On aggregate, that’s how investors behave, and it has never changed and it will never change. You might think you’re different, that you’re a contrarian, but you’re not.
The other thing is that people think that while maybe they can’t pick stocks, the professionals can do it. And all of the studies indicate that they can’t. Hot managers tend to revert to the mean. What happens is that money piles in right after a great performance, and then the money piles out just as fast after a lousy performance. So what ends up happening is that these mutual fund managers, first of all, are expensive; they can be up to 2% with the sales load on top of that. And they’re only human beings and they face career risk. So what they’re going to do is to end up looking a lot like the index because it’s very dangerous, as far as their career goes, to deviate too far from the market returns.
So, on average, investing is a zero-sum game. So if you take the average return minus fees, the average fund will not outperform. It’s just math.