I love watching Antiques Roadshow. I think a complete amateur happening upon a piece of art for $5 at a yard sale only to find out it’s worth $50,000 is, well, fun. You can CLICK HERE to watch one of the most unbelievable moments in the history of the show.
Before entering this industry, I envisioned financial markets as a kind-of giant yard sale. You’d wander around stacks of securities, find a few you thought were worth more than they were priced (or, perhaps, just struck your fancy that day) and leave with some bargains.
If you watch TV or read the paper, it’s not hard to understand why I would have gotten this idea. I’ve also come to find out it’s the way many folks in the industry practice investment management. Day after day, they’re combing the markets, searching for mispriced items, hoping for an Antiques Roadshow-like experience.
What I’ve realized is that wandering through a yard sale isn’t really analogous to browsing financial markets.
Then again, maybe it would be if we changed just one piece of the story – the players. Imagine the people wandering around the yard sale weren’t isolated amateurs but millions of antique experts – the type of folks who work on the Roadshow and know the difference between a Chinese glass vase circa 1453 and a Chinese glass vase circa 1454.
Imagine, too, the people organizing the yard sale were not oblivious homeowners looking to make a few bucks on a Saturday morning, but antiques experts who knew the value of everything being sold. If this were the case, there would be no bargains. The glass vase would sell for what it’s worth.
At Foster Group, we believe the collective knowledge of millions of experts constantly pushes securities prices toward fair value. What this means is that we don’t need to spend our time frantically searching for bargains. Frankly, it would be a bit of arrogance to believe that we, in this ocean of highly-experienced, incredibly well-informed, technologically sophisticated experts, could find a bargain none of them could spot.
And, even if we were miraculously able to find a bargain everyone walked by today, what are the odds of repeating that feat again tomorrow? Not good. Professional money managers seeking to outperform market indices by identifying mispriced securities produce results that are consistently worse than you would expect by random chance. (CLICK HERE – in particular, note pages 5-7.)
Our advice: find a disciplined financial advisor who starts with the belief that securities are priced fairly and builds their investment approach on this foundation – not one who promises a steady stream of Antiques Roadshow experiences. Your long-term success depends on it.
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