The problem with investing is that it’s quintessentially Lake Wobegon—that mythical place from Garrison Keillor’s radio show “Prairie Home Companion,” where “all the women are strong, all the men are good looking, and all the children are above average.”
The fundamental principle of index investing—and, thus, most ETF investing—is that the thing that is most important in investing isn’t insight, it’s discipline.
Disciplined investors have an asset allocation, they stick to it, they use periodic rebalancing to “sell their winners” and “invest in the laggards,” and they minimize all of the costs and frictions as best they can.
But there’s one enormous problem. To do this, you have to accept that you, the investor, are not a special flower. You have to accept that you, the investor, are average.
And nobody likes to be average.
I’m a New England Patriots fan. Right now, they’re the best team in the NFL. I enjoy that far more than if they were the 7-7 Miami Dolphins, the most average team in the game.
Human beings—and I would argue Americans in particular—are hard-wired to want to be on top. Most of us don’t settle for being average in our jobs (even if we are) or having average lives (even if they are). We strive.
This culture of winning runs completely counter to ETF-based index investing. Consider the crowing headlines from this Sunday’s New York Magazine. In its annual “Reasons to Love New York” issue, it listed “Because a Stuyvesant Senior Made Millions Picking Stocks. His Hedge Fund Opens As Soon As He Turns 18.”
The story caught on like wildfire, and the kid in question started getting TV coverage. He was the American Dream. He was the above-average kid from Lake Wobegon. Except, of course, he made it all up.
Focus On Reality
As a financial advisor, this is the human instinct you have to fight against—that desire of your clients to declare themselves winners, whatever the truth is. And it’s particularly problematic in the face of the robo-advisor revolution happening around us. Because the robo advisors remove, explicitly, the human element from investment management, the robo clients have by definition accepted their fate to be average.
In fact, what they’ve done is come to accept that by getting disciplined average market returns, they’re probably going to be ahead of most investors who make up the average, because that average is full of folks who’ve consistently paid too much for underperformance.
As a nonrobo advisor, there’s a constant desire to be able to tell your clients that, because you’re human, you’ll get them above average. You’ll be the mayor of their personal Lake Wobegon.
Perhaps you’ll hand their investments off to a third-party ETF manager like Good Harbor, which seemed to be shooting the lights out, but now has had that above-average return revert to below the mean (down 19.5 percent through last report, versus up 8.3 percent for the boring old S&P 500).
An excellent article yesterday morning on Kitces.com poses the question of what the real value add from human advisors is, and whether it’s worth a value-added fee over what the robo advisors are charging.
Winning By Being Average
I’d argue that the value add isn’t finding a way to get your clients above average. Instead, it’s changing investor behavior. Every time your client calls asking why they’re not in Alibaba stock or why they missed Good Harbor’s golden years, your job is to convince them—over and over again—that the market is not Lake Wobegon, and ultimately, being average is winning in the long term.
And if anyone tells you that’s an easy job, just send them the clip of the kid from Stuyvesant, who wanted so desperately to be seen as a winner he convinced the press to make him a hero.
Contact Dave Nadig at [email protected] or on Twitter @DaveNadig.