Rick Ferri writes about what is sometimes called the Lake Wobegone effect (link). The NPR radio show has a tag line "where all the children are above average" (wiki). For investors, Ferri believes that most have an inflated anecdotal view of their returns. On the Internet, I observe even worse, because the winners report what are often inflated returns, often in hindsight, and the losers rarely report anything. If a person only followed Internet reports, everyone would be above average.
No one likes to think they are below average, but in the investment world, when real world audits are done, most turn out to be below average. How does that work? Shouldn't half be below average, half be above average? It works that way because the top 5% or top 10% enjoy a disproportionate share of the profits. Some reasons why individuals tend to do poorly are chasing performance, and panicking at market bottoms.
Every major bull market sees that kind of pattern. An investment, or investment class in unloved, unpopular, and that is often the time the contrarians and the strict asset allocators buy. As the investment does better it becomes more popular. At every major market top, the fundamentals, the stories about reported profits create a buzz.
No comments:
Post a Comment