“The saddest aspect of life right now is that science gathers knowledge faster than society gathers wisdom.” ― Isaac Asimov
This week is Blogger Wisdom week on Abnormal Returns. As we have done in previous years we asked an esteemed group of independent finance bloggers a series of (hopefully) provocative questions. Yesterday we asked what we would learn (or not) with 1000 of good financial market data. Answers are not edited and the author’s name, blog name and Twitter handles follow. We hope you enjoy these posts as much as we do putting them together.
Question: Ten years hence, what we will be embarrassed by that we were excited about in 2017? (Answers in no particular order.)
Wesley R. Gray, Ph.D., Alpha Architect, @alphaarchitect, co-author of Quantitative Momentum: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System:
Machine learning as a means to improve long-term investing.
Brett Steenbarger, TraderFeed, @steenbab, author of Trading Psychology 2.0: From Best Practices to Best Processes:
We will be embarrassed that we saw passive investing as a panacea, rather than as an artifact of unusual monetary and economic conditions. See the section on The Gullibility Crisis in this worthwhile post. We will be embarrassed by the ill-informed and unsophisticated leap into “quant” strategies currently being undertaken by many money management firms.
The “we” in the question isn’t nearly universal and isn’t remotely personal, but my answer is “Donald J. Trump.”
Installing third party accessible microphones and cameras in our own homes just so we can check the weather and order books hands free.
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Michael Martin, MartinKronicle, The Michael Martin Show, @martinkronicle:
In ten years, we’ll be embarrassed that we didn’t buy as much $AMZN or $DIS that we could get our hands on. Disney, for example, is not sexy but most investors have no imagination. What’s going to happen to earning when $DIS incorporates Augmented Reality and Virtual Reality when it becomes more mainstream? How much would you pay for the experience a magic carpet ride with Aladin or blow up the Death Star in your own X-Wing Fighter?
First, the idea of robots replacing financial advisors is way overblown. People who provide investment-only services are at risk, but advisors providing comprehensive financial planning as well as advice that goes beyond financial statements will thrive.
Second, investors using a heavy dose of alternatives will not do much better than a traditional stock and bond portfolio over the next decade – in fact, I think they will do worse. Too many investment advisors are using alternative investments for the wrong reasons and they have unrealistic expectations for the potential improvement to a portfolio. Diversity is not diversification, particularly if fees destroy the allocation alpha.
That this is the year when active management finally gets its act together; and that the growing popularity of index funds will signal the end of capitalism as we know it.
In 10 years we will NOT be embarrassed about the blockchain because it will be mainstream and fully validated. I don’t want to be on the wrong side of that trade in the long run. But, so many of the individual ideas stemming from the blockchain that seem smart and cutting edge right now will have a pets.com vibe to them later.
The faith in one of the FAANG stocks. (I just don’t know which one.)
I hope we and regulators are embarrassed by allowing hedge funds to convert to mutual funds and the hedge fund track record is allowed to be used to market the mutual fund.
We will likely be embarrassed by whatever it is we fear the most today. For some, that might be something political, for others it might be fear of one of the many bubbles that we read about that probably aren’t real. In the summer of 2002 there was a tremendous fear whipped up because CEOs were going to be required to sign off on reported earnings. This was a follow on from some of the big corporate frauds that emerged coincidentally to the tech wreck. I promise you the fear of this was very real but it coincided with one of two important market bottoms. Most people that I talk to now have no recollection of this threat.
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Most edgy “science” will embarrass us; it almost always does. The innovations don’t come from the scientific method, which only grinds out incremental improvements, but from a few wild speculations stemming from analogical thinking, most of which are wrong.
In investing, equity and other risky asset returns will only have been between 1-7%/year (most likely 4.5%/year) over the period to 2027, much less than the 9.5%/year average, and much less than the 11%/year needed to bail out most defined benefit plans. The pensions and healthcare crises will occupy most of politics, and government economic policy will be either useless or harmful.
Also, 90%+ of the exciting large cap growth stocks will underperform the S&P 500 index to 2027. Deep value investing will make a comeback, because most will have given up on it.
In the age of social media and 24-hour news cycles, we are constantly bombarded by messages that aim for our attention, clicks, and time. To gain perspective, and to regain our sanity, we must distance ourselves from these demands and find better ways to allocate our precious time and attention.
Famed investor/statesman, Bernard Baruch addressed this problem of information overload back in 1957. Speaking to a pre-internet, pre-cable TV audience he wrote, “If anything, too much information may be available today. The problem has become less one of digging out information than to separate the irrelevant detail from the essential facts and to determine what those facts mean. More than ever before, what is needed is sound judgement.”
What usually works is a recent, big trend where everyone is climbing on the bandwagon. How about the idea that there are no experts? Somehow a couple of highly publicized election results and a little psychological research has taken hold. It fits the business model of many current money managers. Within the next ten years we will re-learn why experts are important.
Price-insensitive strategies, most notably “passive investing.”
Lower fees. Don’t get me wrong: all else held equal, lower fees are better for investors. A focus only on fees, however, ignores value delivered. Cheap and expensive are concepts that measure price versus value. While a market-capitalization weighted index fund at 0.40% is expensive, a highly-concentrated factor portfolio at 0.40% may be cheap.
[2017 Campaign] You can help those in need of clean drinking water by taking part in our 2017 campaign.
Avocado toast was never all that great.
I have no idea what it will be but the odds that Vanguard doesn’t hit some scandal or problem seem low to me. It’s nothing against the company. But when admiration is as high as it is now there’s pretty much nothing but downside.
I don’t know, but I am positive that this Romphim I have on will look fantastic in 10 years.
Everyone will say Trump. They will be wrong. We will be embarrassed by dumping a lot of money in wind/solar power instead of nuclear power.
Hopefully people will finally be sick of all the Star Wars sequels by then but I’m not holding my breath. As far as investing goes, my guess is that someone is going to look foolish about both cryptocurrencies and Tesla. Either the ever optimistic tech crowd or the ever pessimistic finance crowd will look silly about their undying love or hatred for these two entities. Tesla or Bitcoin could both be revolutionary if everything goes well and both get enough support from the public in terms of trust and backing or both could be huge failures. However, I am not smart enough to know who will be embarrassed on these two ideas. Both fall into my too hard pile.
Tobias Carlisle, The Acquirer’s Multiple, @greenbackd, co-author of Concentrated Investing: Strategies of the World’s Greatest Concentrated Investors:
Passive investing. If a manager approached you with a portfolio of 500 stocks constructed the way the S&P 500 is, you’d think they were nuts. But it’s become accepted that anything else is “active” and therefore dangerous. The greatest trick the S&P 500 stock selection committee ever pulled was convincing the world it didn’t exist.
Thanks to everyone for their time and effort. The next question asks what one thing bloggers would like to teach investors.