Great Investors are Odd

That good-looking kid in your high school class was voted “most likely to succeed”.

 He always wore the latest fashions, had perfect hair, always said the right things to attract the girls who were interested in a pretty face, and he went on to get a degree in Finance, where he ended up running a mutual fund with The Royal Bank of Canada.

But is he a good investor?

Nope.  He’s too normal.  Normal????  What does that have to do with investing?  Everything.

Normal people want to fit in.  They look the way successful people are supposed to look.  They listen to the music that’s “in” and they travel with the crowd that conforms popularly to expectations.  In short, they cave in to expected peer pressures.

When running their mutual funds, their normality leads to mediocrity.

They’re greedy when others are greedy and fearful when others are fearful

Buffett’s motto is to be fearful when others are greedy and greedy when others are fearful.

But the average investor (and average Wall Street Brain) is too normal to follow the mantra for investment success.  Sure they can end up with massive salaries, but because most retail investors don’t compare their results with indexes, these fund managers (who run those retail mutual funds) keep their jobs, despite their mediocre investment performance.

My online buddy, “Financial Cents”  referred to the world’s greatest investor (Warren Buffett) as an “oddball” when commenting on one of my previous blog posts.  And he was right.  Buffett didn’t fit in anywhere when he was a kid.

He made a career out of symbolically not brushing his hair, wearing ill-fitting suits, listening to the wrong music and hanging out with the wrong crowd.  But most great investors share the “oddity” trait.

Want proof that the good-looking popular school kids make lousier investors?

You can tell a conformist is running a particular mutual fund when you take a close look at it.  Let’s take the Canadian balanced funds that our friend Harry is competing against.  I wrote a lot about how Harry’s balanced stock and bond index account is whipping the balanced funds offered by the Big 5 Canadian banks.

And I made a big deal about it being due to the extra fees associated with actively managed mutual funds.  But there’s far more to it.

Harry is beating them silly because he’s an oddball.  He can take financial wisdom from a textbook and actually apply it—whereas most people can’t.  Take the stock market crash of 2008/2009 as an example.  The typical balanced mutual fund has about 60% stocks and 40% bonds  (or it might have a 50/50 stock/bond allocation).

The banks hire popular, smart, qualified, good looking guys (and gals) to run their funds, and their jobs are to keep their funds balanced, relative to the portfolio allocation they desire (a 60/40 or 50/50, stock to bond ratio with a balanced mutual fund)

Throwing the textbook away

But when the stock market dives or soars enough to mess severely with balanced mutual fund allocations, the fund manager’s job is to rebalance.  In 2009, the actively managed funds from the Big 5 banks would have had (at one point) about 70% in bonds and 30% in stocks, thanks to the crash in the stock market and the subsequent rise in bond prices.  But did they rebalance?  Nope.

They each watched each other, probably.  They might have been listening to the doomsayers—the masses of people suggesting that things were going to get worse before they got better.  And like sheep, despite the crazy allocations they must have had, they did nothing about it.

That’s why Harry really kicked their butts. 

Oddball Harry rebalanced his account, selling some of his bond indexes to buy some cheap stock indexes when the markets were falling.  He didn’t “time” it perfectly.  But he didn’t have to.  When the markets bounced back, Harry was able to easily leapfrog the clones running the balanced funds at the Big 5 banks.

But there was an oddball balanced fund manager who followed the textbook

Following the textbook takes guts.  You have to ignore the popular crowd and just go ahead with what 200 years of history suggests is right.  When stocks are cheap, buy them, selling your bonds if you have to.  If the market drops more, buy more.  Anyone dollar-cost averaging through the crash of 1929 and on for the next twenty years or so would have made a steady fortune.  But he would have been considered “odd”, of course.

So who wins a prize for being one of Canada’s odd fund managers?  MD Management’s balanced portfolio manager.   If you had invested $10,000 with them back in October, 2008, it would be worth more than $12,000 today.  The balanced funds for the big 5 Canadian banks, however, haven’t broken even since the crash of 2008/2009. … read more

It’s clear that the MD balanced fund manager rebalanced like he was supposed to, instead of following the crowd.  To follow the fund’s prescribed portfolio allocation,  he needed to rebalance it when the stock market crash threw it out of whack.  And he probably dances to disco, wears a Mohawk, drives a vintage Pinto and drinks from his everlasting cellar of vintage New Coke.  OK maybe not.  But I’ll bet he’s “different”.

Hats off to the oddballs—easily the best investors.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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3 Responses

  1. Hi Andrew,

    Nice article on how individuals look to conform to the norm when investing. I don't always share my ideas with friends and co-workers because they defy the norm. Nowadays, the norm seem to be what the financial companies market it to be in order to generate revenues from their products. I fail to see how financial literacy will increase when the norm is defined by companies selling products.

    Consequently, I would be curious to know how the bonus are driven for mutual fund managers. Is it performance against index? Is it against competitors? Is about market cap? Bonus have a lot to play on how a mutual fund manager will make some moves.

    Cheers!

  2. Hey Passive Income Earner:

    From what I understand, fund manager bonuses are based entirely on the increase in their respective funds' asset base. If more people flock to the fund, then the fund company makes more money–so the manager gets a bonus based somewhat on the increase. I know that they don't worry about the indexes, just assets flowing in. Two things will drive assets, right? A great sales team and great historical performance. Even if that performance is recent (like a strong 12 month period) investors will still flock to the fund, courtesy of the company's marketting team which promotes the performance.

    Cheers!

    Andrew

  3. Hi Andrew:

    I just discovered the blog and I like it. It's always fun to find interesting new blogs to read.

    Not sure if you're familiar with them, but the guys at Contra The Heard sound like your kind of guys. I'd recommend their site to any deep value/contrarian investor.

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