No More Leeches
Posted July 24th, 2012
It wasn’t all that long ago, in relative terms that were you to find yourself facing some
sort of life threatening indisposition that your local physician may recommend
a course of leeches in order to suck the malady from your person. There is a
misconception that this practice is consigned firmly to the “days of yore” when
in actual fact, there does seem to be fairly recent medical research that adds
credence to the practice. However, the point stands, that at the time the
district quack may not have known better as he obviously wasn’t privy to the
research suggesting otherwise. Mainly because said research hadn’t happened
yet. Perhaps the practice of bloodletting may be a more worthwhile analogy.
Leeches may be more apt as the point becomes clear.
Now, at the other end of 200 odd years of examination and experimentation, medical
practitioners have a weight of research behind them that points out that
applying leeches and bloodletting for a migraine or pancreatic cancer may not
be the most effective course of action. Why ignore the empirical evidence?
If only those financial body builders constantly bench mark pressing around Canary Warf
could take the same view. Why ignore 50 years of evidence that tells us that
it’s nigh on impossible to beat the market?
A typical analogy when referring to the stock markets is often found in weather
predictions. Really it’s difficult to accurately predict what the weather will
be any more than a few days in advance. All we can say is “there will be some
weather”. Taking the long view though, we can be fairly certain that next
summer will be warmer than the winter seasons on either side of it. No really!
The current summer (I use the description loosely!), bad as it may be, is on
average warmer than the winter that preceded it. We can’t predict how much
warmer. We can say it is and more than likely will be warmer though.
Looking at the movements of the stock market leaves us with a similar level of
uncertainty. All we can say is “there will be stock market movements”. We can
say during a down turn that it’s likely the market will recover at some point.
We cannot say when that point will be. Similarly, after an upsurge we can say
that it is likely there will be a plateau and maybe a further upswing, maybe another
downturn. After that though, it’s folly to say much more.
Beyond that, if predicting entire market movements presents such a headache then how much
harder is it to cherry pick stocks that will outperform the market benchmark?
I do not know what the weather will be like next week, but I will bet your money on it
being exactly 26 and a half degrees Celsius in Dorset on Wednesday. Would you
let me take that bet? How about if I made a prediction for the weather in
Tunbridge Wells on Christmas Day? We have 365 days to choose from, an
incredible amount of variations in the weather and an unfeasibly large amount of
choice in locations. Then we shall take 365 weather men and ask them to make
predictions. One will always come out on top, but no more than the law of
averages say so. And yet he would be lauded as some sort atmospheric, climactic
Guru.
On top of all this this, it is your money that these bets are being punted with. And the
incredibly high fees charged in this type of investing will erode your returns
even further.
The evidence tells us that, over the long term this just does not work. And it never will.
The markets are efficient and will produce a return over the long term. That’s it. There is
no magic to it.
Start investing this way and you may find yourself not haemorrhaging money at quite
the same rate. And the way best way to stem the flow is not by letting a leech
carry on bleeding you dry.
