Decades of data show that most professional fund managers fail to beat the market. The evidence is about as settled as evidence gets. And yet most invested money around the world is still actively managed. A video on the Bloomsbury Wealth YouTube Channel.
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Transcript: Robin Powell & Craig Lazzara/ Founder of SPIVA
Robin Powell: Decades of data show that most professional fund managers fail to beat the market. The evidence is about as settled as evidence gets. And yet most invested money around the world is still actively managed. Craig Lazzara spent 20 years measuring that gap at S&P Dow Jones Indices, where he founded and ran SPIVA, perhaps the best known scorecard for fund performance. So why do so many people still use active funds? Part of the answer, he says, is that we’re built this way.
Craig Lazzara: We tend to think that the past is a good predictor of the future. I think we’re, we’re probably wired that way from an evolutionary standpoint, because in most of life that’s pretty good, you know, and it, it’s a good, it’s a good heuristic. It’s a valuable learning mechanism in most of life. And I mean, I, I used to joke about this when I was at S&P saying, you go back to the caveman days. You know, you, you knew when the saber-tooth tiger was, was, was wandering around. You didn’t go outside the cave. Why’d you tell that? ’cause your neighbour got eaten last week. You know, you, you, you observe these things and you learn.
RP: So the instinct isn’t foolish. Almost everywhere else in life, trusting what worked before is sensible. Investing is an exception. But there’s also the question of how the people selling us funds get paid. They may have a financial incentive to recommend certain products.
CL: To the degree that investors take advice from financial planners, advisors, retail brokers, whatever, many times they can get paid more for selling you an active product than a passive product. That doesn’t mean they’re corrupt, that doesn’t mean they’re dishonest, but the incentives are clear that active pays them more than passive pays them. One should know that.
RP: So we’re wired to chase winners, and parts of the financial industry have little reason to stop us. There’s another factor too. Even people who accept the evidence entirely will find a reason why it won’t apply this time.
CL: There will always be somebody who says, yeah, I know you’re right. I know that’s what the past has been, but this is gonna be the year. There’s always something usually comes up in January or February, by the way, you’ll begin to see these articles. Uh, but uh, there’s always somebody who’s gonna say, I accept what the history says, but this time things are different. And that is, of course, an irrefutable argument, not irrefutable ’cause it’s a good argument just because it’s how can you prove a negative?
RP: You can’t disprove ‘this time is different’ in advance. That’s why it survives. Years ago, running a small investment company, Craig wrote down three rules. Never lie to your customer. Never let your agent lie to a customer. And the hard one — never let a customer lie to himself.
CL: From a financial standpoint, you as an advisor have every reason to say, well, yes, I have some managers that I recommend. You know, here they are. I have a, I have a bunch of good ones. In doing that, you haven’t lied to the customer. You have let the customer lie to himself, and I think part of, part of what I think Spiva and this, this effort that I was part of that, that others are part of, to publicise and to advocate for the benefits of, of index investing, the truth is important and is important because SPI a at least, was an effort to help people, not to lie to themselves.
RP: A good adviser isn’t there to confirm what you already hope is true. They’re there to tell you what the evidence says, even when it’s duller than the story you wanted — and to keep saying it when a strong year or a persuasive pitch makes you want to forget. That’s the real job. Not telling you what you want to hear, but making sure you don’t end up telling it to yourself.
Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.
