snow-white-mirror1

Perception: Looking In The Mirror

First, I’m a genius. So is your stockbroker. Err… well, you probably think we are.

The truth is, it’s mostly the marketing departments & cable market news outlets of Wall Street that have you bowing your head in reverence of our super awesome ability to tell you why things are happening at any given moment in time. It’s also your brain’s need to make sense in a senseless world. Your synaptic connections clamor for it. It’s a fun little game we all play, trying to orchestrate a symphony out of the noise.

Why did the market drop 400 points? Bad data economic datapoint and something about Europe. Why did it rally yesterday? A not-so-bad economic data point & something about Europe.

The truth is, the market is a lot like this picture. Is it Old Lady with a huge nose or a beautiful lady looking away?

It’s both, right?

And just like with this picture, in the market everyone is right & wrong at any given moment in time. It’s all about perception. But over time, the truth, or the prevailing vision of it, is what we hold onto — until someone or something shows us differently.

Looking In The Mirror 

According to a 2005 academic study, when you factor in luck (not that there’s anything wrong with luck), something like 1% of the world’s investors are the only ones truly adding Alpha (real return for the level of risk taken). That means for the other 99%, they probably should stop trying to beat the market — like right now. The futility of that notion actually makes sense to me, I seem to remember hearing something about the 1% ruling the world…

And here we are, sitting at our broker’s faux cherry desk as they show us a portfolio full of active management — mostly based on the premise that by using them we’ll be part of that 1%. We’ll be part of the elite few.

Now, did you know that there are something like 45,000 different mutual funds right now? Did you know there are 600,000+ stockbrokers in our industry? I’m not even going to mention all of the ETFs being spawned now. I’m not going to talk about the over 10,000 Separate Account Money Managers Morningstar is currently following.  In any of these cases, chances are you don’t have much of the 1% the industry has to offer.

Meanwhile, today’s wirehouse firms are interested in being everything to everyone (but mostly rich people). They want to trade the accounts (collecting all of those juicy commissions while 99% of the managers churn your account, adding no value), custody your assets (and all of the account fees), lend you money (more fees), and give you advice about all of their wonderful products and services (in which they are clearly not biased). They rarely say NO.

And why would your crack dealer not keep selling you more, especially if you can pay?  (see post: NO)

The Truth Shall Set You Free

It’s also probably never going to change, at least until Wall Street adopts a fiduciary standard OR we vote with our money by leaving en masse — which will probably be right around the time when pigs fly.

Ultimately though, even in the face of the old lady with the huge honker, bankers know that most people won’t leave because it’s too hard to stop using their bill pay service. And do you blame them? I do. (see post: Dolphin Safe Banking System)

And yet somehow, even in the face of all of this reality, we still trick ourselves into thinking Goldman Sachs’ Conviction List and those other glorious recommended lists from the other firms represent the 1% — mostly because it’s at the front of our mind, blaring at us from the television & news sites.

We trick our minds into thinking that Goldman & Co. can create products, trade their own balance sheets, research the companies, take the same companies public and create investment products for them, and be unbiased about telling you what to do with your money while they have all of this information at their spindly fingertips.

So, what is an investor to do? Is it the Old Lady or Beautiful Woman getting ready to glance your way?

It’s probably time to take a hard look in the mirror.

6 thoughts on “Perception: Looking In The Mirror

  1. Pingback: Thursday links: doing everything they can | Abnormal Returns

  2. Mr Fancypants

    It took me a long time to see the Old Lady with the big nose. Which I think is telling in that I have a harder time seeing how my investment decisions will fail as opposed to how well they’ll do.

  3. Scott Bell

    If you don’t have expectations on both sides of the investment, you’re missing half the picture. The saddest part though… you’ll never get the whole picture from the legacy Wall Street firms.

  4. Pingback: Business risk and the risk of underperformance | Abnormal Returns

  5. Pingback: Thursday links: doing everything they can

  6. Pingback: Weekend reading: Italy pushes me to the tipping point

Comments are closed.