Investment Core Principles All NFL Players Need to Know

Erik and Justin bring us up to speed on the market, economy, and investing. This week marks an incredible rally off the COVID bottom for all equity markets. Unemployment is trending in the right direction and at the lowest level since the pandemic began. The SEC is finally looking into SPACs (special purpose acquisition companies) and their relative freedom from regulation and investor protection. WeWork, who had a failed IPO last year, is going public through a SPAC at a much smaller valuation. Bank stocks have proven resilient through the pandemic and have been given permission to return capital to shareholders through dividends and then buybacks starting in June.

Discipline

This is a principle that all NFL Players should understand. Doing the simple fundamentals over and over with consistency is what allows an NFL Player to stay elite. A team making the fewest amount of mistakes will end up winning the game on Sunday. This seems like it would be easy but watch any sports competition and is a tough task. This happens in investing when a good strategy is ruined by failing to follow the process, impatience, or emotions.

“We at AWM believe that the evidence shows you can outperform the market over the long term based off of the evidence, off of some of these factors that we've talked about in our previous podcast, on the sources of returns. I think that will always be available, because people are emotional. People do not stay disciplined. We know this, that a large part of life is when you look at high performance people that outperform, a lot of times it's just, how did they behave? Were they willing to do things that were uncomfortable that nobody else was? And now you get your outperformance. -Erik Averill

This has been discussed on previous podcasts but allocating to sources of returns that have the persistence, pervasiveness, and highest confidence in compensated risks enables you to have the best chance to outperform the market.

Investing Performance is Emotionally Counterintuitive

Wall Street is very good at selling you that they can predict the future. Active managers have clearly shown in their win/loss column they are not adding to your wealth but racking up the W’s for themselves. Charging 1-1.5% as an active fund manager and then not backing it up with outperformance can only exist because of uninformed or unmotivated investors.

“Well, what I was going to say is, and I think this is so hard emotionally for us as humans, because in so many other areas of life, there is this outperformance in whatever we do, because of the extra hard work that I've put in. Or this skill. So it's hard to emotionally believe what we're saying here is that these organizations, these huge investment funds, mutual funds, hedge funds that have all these analysts all over the world and spend all this time in this technology, what we're saying is that all of that's for nought. That they literally are spinning the wheels in charging you, the investor, these expensive expense ratios to underperform the market.” -Erik

Any investment professional can look at this information but very few have any incentive to keep fees low for their investors. The higher fees are great for Wall Street and asset managers that like to buy homes in the Hamptons or a new Ferrari. Conflicts of interest must be reduced to as close to zero as possible. The best way to do this is to avoid brokers and hire independent advisors that are only loyal to you. Then also align any incentives of the advisor with the athlete.

Persistence

Winning over and over again is one of the hardest skills in investing. The data from SPIVA measures exactly how hard it is to outperform passive indexes. The fact that the longer the time frame the less active managers win validates short-term results should be ignored. This can be extraordinarily difficult as every investor wants to be on the winning team. These fund managers attract massive amounts of capital and then are unable to reproduce the same kind of returns that warranted all the press in the first place.

“Highly, highly intelligent people. And I think that that's always the case we forget. What we're not saying is, is that people aren't intelligent. We're actually saying the opposite, that there are so many intelligent individuals and incredible technology and software and trillions of dollars flowing through this. And oh, by the way, it's regulated. It's publicly traded information available at the same time. What we're not saying is that the price is necessarily right. None of us really know is the price right or wrong. It's just, you can't trade on it quick enough to trade it on either way in any predictable fashion.” - Erik Averill

It’s not that people buying and selling in the market are stupid. It's the opposite. There are too many smart people that there is virtually no alpha to be gained because it is so competitive. This is a great thing for long-term investors.

Cognitive Dissonance

Bear with me on this tangent but the reason so many investors refuse to believe the data and therefore receive inferior long-term returns is because the human brain is really good at ignoring information that does not fit our personal narrative. You can go deeper into what cognitive dissonance is but it’s really just the harmonization of our thoughts with the reality we experience. If these are at odds, we rationalize or rewrite our narrative to achieve mental equilibrium. If you have ever seen the show Westworld on HBO, the first season does an excellent job of describing cognitive dissonance in the hosts. Besides being excellent entertainment and one of my favorite shows it also has broader elements of human psychology. You are welcome for the recommendation (only season 1, I take no accountability for 2 and 3).

It is okay to trust the evidence and what the data has shown for long-term investors. It’s not like this information is secret either, as many other people, besides us, write about this sort of thing. Investing on emotions by either panic buying or panic selling is not a good strategy. Jumping in and out of the market in an effort to time the top or bottom eventually leads to poor returns. Hope is also not a good strategy. Hoping a fund manager outperforms by picking stocks is not a great way to stay wealthy. If you don’t have clarity and high confidence in your investment strategy, I suggest Independent, individualized, integrated investment advice.